Stocks fell and the US dollar extended its gains on Tuesday as markets were gripped by fears of a global recession.
The European Stoxx 600 share index lost 0.5 per cent in early dealings, taking it about 15 per cent lower for the year to date, while a broad MSCI index of Asian equities touched a fresh two-year low.
The dollar index, which measures the US currency against six others and has a large euro weighting, rose to its strongest level since 2002. The euro traded close to parity with the greenback, buying $1.002.
Investors have been spooked by business and consumer surveys that indicate a looming US slowdown, with the central bank’s ability to support markets stymied by rampant inflation that data to be released on Wednesday are expected to show hit a fresh four-decade high of 8.8 per cent last month.
Recession fears are even more intense in Europe, where the possibility of Russia retaliating against sanctions for its invasion of Ukraine has driven worries about Moscow cutting off gas supplies, exacerbating an energy shock and cost of living crisis.
“The 1970s show it is perfectly possible to have a recession and still-uncomfortably high inflation,” said Nicholas Colas, co-founder of DataTrek Research. “The way the economic data is developing this year, we seem to be in a similar situation for now.”
Analysts expect the US Federal Reserve to raise interest rates by as much as 0.75 percentage points at its July meeting, following a similar move last month. But futures markets reflect scaled-back predictions of how far the US central bank will lift borrowing costs in the months ahead, now pricing in a benchmark interest rate of just under 3.5 per cent for early 2023.
The current target range for the Fed’s benchmark policy rate is 1.50 to 1.75 per cent.
Meanwhile, investors are awaiting the start of the quarterly earnings season for evidence of the impact inflation and weak consumer sentiment are having on businesses.
“The current weaker economic momentum combined with the rise in costs will produce more concern in CEOs’ announcements in relation to pricing power and corporate margins,” said Michele Morganti, senior equity strategist at Generali Investments.
Analysts, he added, were likely to cut company earnings estimates for the second half of the year.
Government bonds, which had rallied on Monday, continued to rise in price as traders sought out the haven assets.
The yield on the 10-year US Treasury note, which moves inversely to its price and underpins debt costs worldwide, fell 0.06 percentage points to 2.93 per cent.
The two-year Treasury yield fell 0.06 percentage points to 3.01 per cent, trading above the 10-year in a so-called inverted yield curve pattern which has historically predicted recessions.
Futures linked to TTF, the European wholesale gas price, were 1.4 per cent higher at €171.5 per megawatt-hour, remaining more than double their level of early June.
Brent crude, the international oil benchmark, fell 2.1 per cent to $104.86 a barrel.