Wall Street Risks a Breaking Point After Week of Monetary Mania

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To Alpha Theory’s Dunn, Friday’s collapse in British bonds and currencies may have become an event risk that contributed to the rout in assets like oil and silver. 

Yields in 10-year UK government bonds saw their biggest one-day jump on record after a tax-cut package fueled concerns about inflation and further monetary tightening. The pound tumbled to the lowest level since 1985, sliding 3.5% in the third-largest drop in 20 years.

“These look like forced liquidations,” Dunn said.

Chaos is the signature feature of global markets in the pandemic era. But the widespread turmoil is a new experience for those investors who had enjoyed smooth returns built on free money in the previous decade.

Now, central banks around the world are racing each other to step up their fight against inflation at the cost of growth. Just this week, more than a dozen central banks moved to tighten monetary policy. Some were forced to hike rates to protect their dollar peg, such as United Arab Emirates and Saudi Arabia. 

Suddenly, worries about whether there will be a recession have turned into bets on just how bad the pain will get. Traders ratcheted up wagers that signaled angst over a serious entrenchment, with the yield curve between two-year and 10-year Treasuries reaching the most negative level since early 2000. 

Meanwhile, two-year Treasury yields have climbed for 12 straight days, a streak of losses not seen since at least 1976. 

“When you’ve got the chief policy maker and others saying, ‘We’re going to inflict pain,’ that’s scary and it challenges anyone that had a more rosy picture,” said Chris Gaffney, president of world markets at TIAA Bank. “It comes back to the confidence in policy makers to steer us through this and I think that’s been shaken.”  

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