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(Bloomberg) — ‘Sell everything but the dollar’ is resounding across trading desks as investors reprice the risk that the Federal Reserve hikes rates more aggressively than previously thought.
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While Asian risk assets opened the week in the red, catching up on Friday’s declines in the US and Europe, a renewed selloff in American securities stood out. The pace was brutal: S&P 500 contracts dropped as much as 1.7%, putting the benchmark closer to bear-market territory again. Yields on two-year Treasuries jumped to a 15-year high.
In Europe, equity markets also sank again, with the Stoxx Europe 600 down 1.4%. A selloff in government bond markets gathered pace, with benchmark Italian bond yields rising to their highest level since 2014. Germany’s two-year yield climbed above 1% for the first time since 2011.
More selling may lie ahead as strategists see rising odds for a 75 basis-point Fed hike, something Barclays Plc says may come as soon as this week. That follows data on Friday that showed inflation in the world’s biggest economy accelerated to a fresh 40-year high and consumer sentiment hit a record low.
“The problem for risk assets is that it’s in a conundrum. We’ve got the choice between two bad choices” of stronger inflation or weaker growth, said Max Kettner, chief multi-asset strategist at HSBC. “The big change from Friday — that narrow path of goldilocks, that soft landing path — has become ever more unlikely.”
If Friday’s shock CPI jump has dashed hopes that US inflation has peaked, it’s also undermined bets the Fed could take a rate hike pause later this year. It has given fresh impetus to the idea of super-sized hikes — which have become wagers on a 75 basis-point move rather than just 50 basis points, as had been the case at the beginning of 2022.
“Against this backdrop it’s hard to make the case for anything but a return to the lows we saw last month for the S&P 500 and the Nasdaq 100, and the prospect of further weakness,” said Michael Hewson, chief market analyst at CMC Markets UK. “In the space of a few days, markets have gone from optimism that inflation might be on the cusp of plateauing, to rising apprehension that we could not only see higher prices, but that prices might well remain higher for a lot longer than originally thought.”
Brace For It
By lunchtime in Singapore, contracts on all major US equity gauges were deep in the red. Yields on 10-year Treasuries had risen three basis points to 3.18%, approaching the three-year high reached in May.
“US inflation sends a bearish reminder to markets, brace for a ton of risk averse behavior this week with Fed meeting on tap,” Saxo Capital Markets strategists including Charu Chanana wrote in a note. “A slip in US consumer confidence levels is also sending shock waves of concerns around an economic slowdown.”
An exception to the wave of US-related selling is the dollar — the biggest beneficiary of safe haven demand from Tokyo to New York.
The world’s reserve currency climbed against every major peer on Monday, with the Norwegian krone and Korean won among the biggest losers against the greenback.
“The dollar has assumed the role of the global stagflation hedge with USD cash being one of the few financial assets offering returns,” George Saravelos, Deutsche Bank’s global head of currency research in London, wrote in a note.
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