Global stocks and government bonds drop on inflation fears

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Global stocks and government debt markets sold off on Monday as investors ramped up their predictions of sustained high inflation driving aggressive interest rate rises.

Europe’s Stoxx 600 share index declined 2.2 per cent in morning trades, putting it on track for its fifth straight session of falls. The regional share gauge has lost 9 per cent so far this quarter.

Futures trading implied the US S&P 500 index would lose 2.4 per cent in early New York dealings. The broad stock barometer also fell 2.9 per cent on Friday to close out Wall Street’s worst week since January.

Contracts tracking the tech-heavy Nasdaq 100 index fell 3 per cent as shares in more speculative growth stocks took a hit from the flight away from market risk. In cryptocurrencies, the price of bitcoin tumbled almost 17 per cent on Monday to around $24,300 — almost two-thirds below its November peak.

At its monetary policy meeting this week, the US Federal Reserve is expected to confirm its willingness to rapidly raise interest rates to curb consumer price increases that hit an unexpectedly high annual rate of 8.6 per cent in May.

The US is on track to tip into recession next year, according to 70 per cent of leading economists surveyed by the Financial Times and the Initiative on Global Markets at the University of Chicago’s Booth School of Business.

“Recession risk is very elevated right now,” said Julian Howard, lead investment director for multi-asset solutions at fund manager GAM.

“It’s all looking pretty ugly in the short term and there is nowhere really to escape from it, apart from going into cash for now.”

In government bond markets, the yield on the two-year Treasury note, which reflects interest rate expectations, rose 0.16 percentage points to 3.21 per cent as the price of the debt instrument fell.

Money markets are tipping the Fed to increase its main funds rate to 3.4 per cent by December, from a rate of between 0.75 per cent and 1 per cent at the moment.

The dollar index, which measures the world’s reserve currency against six others, rose 0.4 per cent.

In Europe, Italian stocks and bonds came under renewed pressure after the European Central Bank last week paved the way for its first interest rate rise in more than a decade next month and potentially an extra-large half-point rise in September.

The yield on Italy’s 10-year bond rose 0.14 percentage points to 3.98 per cent, more than quadruple its level of mid-December. Shares in Italian bank Intesa Sanpaolo dropped 4 per cent, taking their two-day decline to more than 11 per cent.

Sterling fell 0.8 per cent against the dollar to just over $1.22, pushed down by a strengthening US currency and concerns for the UK’s economic outlook.

Economists see the Bank of England lifting its main borrowing rate by 0.25 percentage points on Thursday, with an increasing chance of a 0.5 percentage point rise — escalating fears of stagflation driven by a cost of living crisis combined with higher debt costs.

In Asia, the yen touched a 24-year low of ¥135.19 per dollar, ahead of a monetary policy meeting by the Bank of Japan this week where it is expected to maintain ultra-loose monetary policy in a bid to support economic growth.

A broad FTSE index of Asian shares outside Japan fell 2.8 per cent and the Nikkei 225 in Tokyo lost 3 per cent.

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