Global stocks dropped and the US dollar and Treasuries rallied on Monday as new lockdowns in China, fears of aggressive interest rate rises and a slowdown in economic growth pushed investors to search for safety.
The declines followed steep falls on Friday that were sparked by weak economic data and hawkish signals from the US Federal Reserve about rate rises next month.
Wall Street’s S&P 500 share index dropped a further 1 per cent in early New York dealings after shedding 2.8 per cent on Friday in its second-worst trading day of the year so far. The technology-heavy Nasdaq Composite fell 0.9 per cent.
Brent crude, the oil benchmark, dropped 5.9 per cent to $100.38 a barrel.
London’s FTSE 100, France’s Cac 40 and Germany’s Xetra Dax were also hit by declines. Europe’s Stoxx 600 fell 1.5 per cent as traders brushed off a decisive election victory for French president Emmanuel Macron.
“As in previous times when markets have cracked, a lot of headwinds are coming together, although the China situation looks like the big catalyst today,” said Neil Birrell, chief investment officer at Premier Miton Investors. “It is hard to find good news anywhere and I can find good reasons to be negative on almost every asset class.”
Mainland China’s CSI 300 share index closed 4.9 per cent lower as panic buying gripped Beijing, where residents are braced for harsh social restrictions similar to those implemented in Shanghai. The renminbi fell 1 per cent against the dollar. Japan’s Nikkei 225 share index dropped 1.9 per cent.
Fed chair Jay Powell said last week a 0.5 percentage point interest rate rise was “on the table”. Analysts at Jefferies on Monday forecast that the Fed would also raise rates by the same amount in June, July and September, after the annual pace of US inflation soared to a four-decade high of 8.5 per cent in March.
The “awful US/global equity market action reinforces our belief that stocks will not bottom until investors feel that likely future Fed rate policy is entirely baked into asset prices”, Nicholas Colas, co-founder of DataTrek Research, said in a note to clients.
Matt King, global markets strategist at Citi, also cited a plan by the Fed to shrink its $9tn balance sheet — which swelled during the Covid-19 crisis as the US central bank conducted unlimited bond purchases to inject liquidity into the financial system — as a reason for “the sudden shift weaker in markets”.
King added: “Unfortunately it’s hard to say whether this immediate liquidity drainage is now fully priced in.”
The dollar index, which measures the US currency against six others including the euro and the yen, rose 0.4 per cent to its highest point since late March 2020. The euro declined 0.6 per cent against the dollar to $1.07. Sterling lost 0.8 per cent to $1.27.
Despite surging inflation and rate rise expectations, there was heavy buying of US Treasuries on Monday as traders bought up the low-risk assets in anticipation of an economic slowdown.
The yield on the benchmark 10-year Treasury note dropped 0.11 percentage points to 2.82 per cent as the price of the debt instrument rose, while the policy-sensitive two-year Treasury yield fell 0.12 percentage points to just 2.59 per cent.
The commerce department on Thursday is forecast to report that the US economy grew at an annualised rate of 1 per cent in the first quarter, marking the weakest growth since a Covid lockdown-induced recession in 2020.
US big tech groups Amazon, Facebook owner Meta and Apple are set to release quarterly earnings this week, after streaming group Netflix shocked investors last week by reporting it was losing subscribers for the first time in a decade.
