By Dhara Ranasinghe
LONDON (Reuters) – World stocks headed back towards their lowest levels in almost two years on Tuesday, with sentiment weighed down by unease about rapidly rising interest rates, an escalation in the Ukraine war and China stepping up pandemic measures.
There was a modest respite for Britain’s battered bond market after the Bank of England said it would start purchasing inflation-linked debt.
European stocks opened broadly lower. MSCI’s index of Asia-Pacific shares outside Japan fell almost 2% to its lowest since early 2020, with chipmakers and China tech stocks taking a beating from U.S. export curbs aimed at hurting Chinese technology development.
Taiwan’s Semiconductor Manufacturing Co for instance slumped more than 8%.
Wall Street was tipped to open lower, judging by trade in U.S. stock futures. And MSCI’s world stock index was down 0.5% — moving back towards roughly two-year lows hit last week.
“We are heading toward a serious economic downturn and central banks are tightening policy, which is a bad combination for markets,” said Berenberg chief economist Holger Schmieding.”When do markets start to look beyond this? The next two months could be still rough.”
Emerging market stocks hit their lowest level since April 2020 and are on track for a near-30% tumble year-to-date, its worst year since the 2008 global financial crisis.
Exacerbating global growth worries was news from China that Shanghai and other big Chinese cities have ramped up testing for COVID-19 as infections rise, with some local authorities hastily closing schools, entertainment venues and tourist spots.
British government bond or gilt yields edged lower, having soared on Monday, following the BoE’s latest efforts to shore up the battered bond market.
Citing a “material risk” to financial stability, the BoE said it would buy up to 5 billion pounds of index-linked debt per day from Tuesday until the end of the week.
Bonds globally have been sideswiped by the rout in gilts, pushing even yields on U.S. Treasuries up sharply on fears that pension funds were being forced into fire sales of assets.
Treasury yields pulled back with their UK peers following the BoE announcement but 10-year yields were still up around 7 basis points higher at around 3.95%.
The backdrop of the bond market rout is ever higher interest rates. Nerves are fraying ahead of Thursday’s release of U.S. inflation data which could set the stage for another big hike from the Federal Reserve in November.
“Inflation is stubborn, and the Fed needs to go beyond, above beyond what the market is expecting,” said Tai Hui, chief Asia-Pacific market strategist at J.P. Morgan Asset Management.
Futures pricing shows traders are positioned for about a 90% chance of a 75 basis point Fed hike next month and for the Fed funds rate to hit 4.5% by February and stay there most of 2023.
That outlook is giving dollar bulls another run and has the greenback drifting toward the milestone highs it scaled last month.
The dollar fell to a 2-1/2-year low of around $0.6248 and the dollar hit a low of $0.5536. [FRX/]
The euro edged 0.12% higher to $0.9718 and sterling clawed back ground to trade flat on the day at $1.1049.
The Japanese yen, at 145.51 per dollar, was within sight of the level that prompted official support a couple of weeks ago.
Japanese Finance Minister Shunichi Suzuki said the United States showed understanding to “a certain extent” on Tokyo’s currency market intervention last month, giving Japan’s first public indication of U.S. backing for the move.
fell 1.61% to $94.61 a barrel. was steady at $1,668 an ounce.
($1 = 0.9069 pounds)