The euro slumped further on Wednesday and government bond prices in the region rose, as investors sought haven assets on fears of a looming recession.
Europe’s common currency lost 0.8 per cent against the dollar to $1.018, slipping below $1.02 for the first time in 20 years. An index measuring the US currency, seen as a shelter during times of rising uncertainty, against a basket of six others continued to strengthen, after rallying in the previous session.
In sovereign debt markets, the yield on the 10-year German Bund — a proxy for eurozone borrowing costs — fell 0.08 percentage points to 1.11 per cent, while the two-year yield dipped 0.12 percentage points to 0.31 per cent. Bond yields fall as their prices rise.
The yield on the benchmark 10-year US Treasury note slipped 0.02 percentage points lower to 2.79 per cent, remaining below the yield on the two-year bond after inverting for the third time this year on Tuesday. So-called inversions, when yields on 10-year Treasury notes slump below those of their shorter-dated counterparts, have preceded every US recession in the past half-decade.
In a further indication of investors’ fears about slowing growth, the yield on the 30-year note also fell, dropping below 3 per cent for the first time since May, as investors sought haven assets.
In equity markets, Wall Street’s S&P 500 and the tech-heavy Nasdaq Composite moved between small gains and losses.
Data compiled by Nicolas Colas, co-founder of DataTrek Research, showed that dollar peaks correlated with the exact days of lows for the S&P 500 in 2009 and 2020. “The dollar has given useful information at prior major US large-cap equity lows,” he said. “The fact that it continues to strengthen versus the euro, pound, and other currencies tells us to expect further US equity volatility.”
Expectations of an economic slowdown had on Tuesday pushed the Nasdaq higher, leading it to close up 1.7 per cent as investors ploughed into companies such as Amazon and Facebook owner Meta, which are typically expected to sustain earnings growth during times of market stress.
Aggressive monetary policy tightening has hammered the valuations of tech companies this year, with the prospect of higher interest rates biting into their projected cash flows and earnings.
But, helping those groups, fears of a slowdown have in recent weeks brought down investors’ expectations of how far the US Federal Reserve will raise interest rates. Markets are now pricing in a benchmark rate of roughly 3.3 per cent by February 2023, down from expectations of 3.9 per cent just over three weeks ago.
Futures markets also reflect scaled-back projections for rate rises in the eurozone.
Elsewhere, European stocks rallied on Wednesday, pushed up by a sharp rise in the shares of Just Eat Takeaway after Amazon agreed to take a stake in the company’s Grubhub arm, and by stronger than expected German industrial data.
The regional Stoxx Europe 600 index bounced back from steep declines in the previous session to rise 1.8 per cent. London’s FTSE 100 gained 1.6 per cent. In Asian equity markets, Hong Kong’s Hang Seng lost 1.2 per cent as new Covid-19 outbreaks compounded recession fears.
Brent crude slipped 1 per cent lower to $101.8 per barrel, after the international oil benchmark plunged more than 9 per cent on Tuesday. US marker West Texas Intermediate fell 1.1 per cent to $98.45, having slipped below $100 on Tuesday for the first time since May.
The pound lost 0.3 per cent against the dollar to $1.19 on Wednesday as more ministers resigned from Boris Johnson’s government, following Rishi Sunak’s resignation as UK chancellor on Tuesday night.
