The S&P 500 was poised to open in bear market territory, while global stocks tumbled and bond yields soared as inflation fears rattled investors around the world.
S&P 500 futures fell 2.2% on Monday. A drop of more than 1.3% by Monday’s close would push the index into bear market territory, a 20% drop from its recent high. Contracts on the tech-heavy Nasdaq 100, which entered a bear market in March, fell 2.8%. Dow Jones Industrial Average futures fell 2%.
Markets have shifted this year as investors assess the risk of rising inflation and central bank officials plan to pull back on stimulus to keep the economy and markets functioning during the pandemic. Data on Friday showed U.S. consumer prices rose 8.6% in May from a year earlier, the fastest pace since 1981. The report forced many to lower expectations for a rate hike by the Federal Reserve.
“The mere fact that it beat expectations strikes a nerve for investors and shows how difficult it is to control inflation,” said Susannah Streeter, senior investment and market analyst at Hargreaves Lansdown. “The worry is that inflation is getting too hot. , central banks can’t deal with it, and they’re going to have to pour cold water on the economy in the form of policy tightening.”
The Fed will begin its final two-day monetary policy meeting on Tuesday, and most investors expect the central bank to announce a half-point hike in its benchmark interest rate on Wednesday. But expectations that the Fed will be forced to become more aggressive this year have risen since Friday’s inflation report.
Futures bets on Monday showed traders had about a 78 percent chance the Fed would raise rates by 2.5 percentage points by year-end, according to CME Group data. That equates to a 0.5% rate hike at every Fed meeting this year.
Traders on Friday pegged a 50 percent chance of that scenario, according to CME Group.
U.S. tech stocks, which have surged during the pandemic, faced sharp losses on Monday. Apple shares fell 2.8% in premarket trading, while Amazon shares fell 3.4%. Chipmaker Nvidia fell 4.3% in premarket trading, while Tesla fell 2.7%. Facebook’s parent company Meta Platforms fell 3 percent.
“It’s called a bear market, where there’s fear, people are being driven out of the market, people are emptying their portfolios and capitulating,” said Todd Morgan, chairman of Los Angeles-based Bel Air Investment Advisors.
Nonetheless, Mr Morgan said developments over the next month or two could help contain inflationary pressures, such as lower demand for petrol after the summer and a slowdown in housing demand due to rising mortgage rates.
“Opening up China is also a big deal,” he said, as it would help ease supply chain constraints. Data last week showed that Chinese exports to the rest of the world surged in May as Covid-19 restrictions were eased, contributing to signs of an economic recovery there.
Expectations of rate hikes are reflected in bond markets as yields continue to rise after hitting their highest levels since November 2018. The yield on the benchmark 10-year U.S. Treasury note rose to 3.238% from 3.156% on Friday. When prices fall, bond yields rise.
Cryptocurrencies continued to slide on Monday after interest rate concerns sparked a weekend sell-off. The largest cryptocurrency, bitcoin, was trading around $23,900, down nearly 13 percent from 24 hours earlier, according to CoinDesk. Ethereum was down 15.9% at $1,228 from 24 hours ago.
Overseas stock markets were shaken by fears of tightening U.S. policy and a potential slowdown in growth in the world’s largest economy. The pan-European Stoxx Europe 600 fell 2.1%, while Britain’s FTSE 100 fell 1.9%.
The delivery platform was one of the biggest losers in the European trading hours. London’s Deliveroo plunged 13%, while Germany’s Delivery Hero fell 5.6%.
“Their businesses are built on consumer sentiment and appetite,” said Ms. Streeter of Hargreaves Lansdown. “If people are feeling the pinch they’ll walk to the grocery store instead of getting food delivered.”
Stock indexes in Asia weakened, with Hong Kong’s Hang Seng, Japan’s Nikkei 225 and South Korea’s Kospi Composite all retreating by around 3% or more. In mainland China, the blue-chip CSI 300 index lost about 1.2%.
In currency markets, the dollar gained against a range of its peers with the ICE Dollar Index up 0.6% to 104.73. Higher U.S. interest rates typically boost the value of the dollar.
The possibility of an even wider interest-rate differential between the U.S. and Japan pushed the yen down further on Monday. The Japanese currency fell to a new multidecade low, weakening beyond 135 per dollar to trade at its weakest since 1998.
A weaker yen usually boosts Japanese exporters’ profits, but shares of exporting companies, including electronics and machinery makers, fell on Monday on fears that a Fed rate hike would cool the global economy. Shares in Toyota Motor Corp fell 3.3% in Tokyo, while Sony Group shares fell 3.3%. A decrease of 4.9%.
“The level of concern is so high that any expectation of a benefit from a weaker yen has been dashed,” said Masahiro Ichikawa, a strategist at Sumitomo Mitsui DS Asset Management.
Currently, the Bank of Japan is trying to keep interest rates low, adding downward pressure on the yen. The Bank of Japan on Monday carried out its largest daily fixed-rate purchase of Japanese government bonds since July 2018 to keep benchmark 10-year yields at or below the bank’s 0.25 percent ceiling.
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