Following the high inflation print in the US last Friday, with the consumer price index coming in at 8.6%, markets sold off once more this week as fears rose that the already narrow path to a soft economic landing just got a whole lot narrower. Speculation on Monday that the US Federal Reserve (Fed) would raise rates by 0.75% came to pass on Wednesday, as the Fed raised rates to 1.75% (range 1.5% to 1.75%) and signalled that there was a high probability of a similar increase at its July meeting. This was followed by the Bank of England raising rates by 0.25% to 1.25%, and the Swiss National Bank increasing rates by 0.5%, its first rise in fifteen years.
As of 12pm on Friday, London time, US equities fell by 6.0% over the week, with the US technology sector dropping 6.1%. European stocks lost 3.6%, whilst the UK market fell by 3.0%. Japanese equities were down 5.5% and Australian stocks declined by 6.6%. Emerging markets fell by 4.4%, although domestic Chinese stocks managed to buck the trend, rising 1.0%.
Government bond yields, which move inversely to price, rose as markets priced in higher future rate expectations, with US interest rates now expected to hit 3.6% by the end of the year. Intraweek, 10-year yields on US Treasuries rose to 3.49%, a level not seen since 2010, before settling back down to 3.22%.
German bund yields touched 1.89% although, more worryingly, the more indebted Eurozone countries have seen their yields back up even more. Italian yields reached 4.18%, which is a yield spread above German bunds of 2.4%, with Greece suffering a similar fate as yields rose by 2.9% above Germany’s. Not oblivious to the dangers for the Eurozone, the European Central Bank (ECB) convened an unscheduled meeting and announced that they would speed up work on a new “anti-fragmentation instrument” to tackle widening borrowing costs, although few details are known at present. Following this, the yield premium countries such as Italy and Greece are suffering fell, with the Italian yield premium now standing at 1.9% and 2.3% for Greece.
The price of gold fell by 1.5% as rate expectations in the US rose, with the precious metal now trading at $1,848 an ounce. In many respects it has been a similar, although magnified story for Bitcoin, which has fallen by close to 70% since its peak in November. One bitcoin is now trading at $21,100, a fall of 22% over the week. However, it remains 185% higher than where it traded at the start of 2020.
As the risk of recession from rising rates increases, so the value of industrial commodities fell. Copper dropped by 3.9%, now trading at $9,080 whilst crude oil prices also moderated, with Brent crude falling by 1.9%, now trading at $119.7 a barrel.
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