Global stocks and government bonds drop sharply on inflation fears

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

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

Futures trading implied the US S&P 500 index would lose 2.2 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 2.6 per cent as shares in more speculative stocks took a hit from the flight away from market risk. The cryptocurrency bitcoin has tumbled almost 20 per cent since Friday to around $24,000, almost two-thirds below its November peak.

Data last Friday showed US consumer price inflation hit an unexpectedly high annual rate of 8.6 per cent in May as the war in Ukraine pushed up fuel and food costs.

Money markets on Monday implied the Fed will increase its main funds rate to 3.4 per cent by December, from 0.75 per cent to 1 per cent currently.

Goldman Sachs, the US investment bank, on Monday upgraded its rate rise predictions to include 0.5 percentage point increases in June, July, September and November and further quarter-point rises in December and January.

“There is very little chance of the Fed pivoting to support financial markets until there is a trend of very meaningful economic disappointments,” said Seema Shah, chief strategist at Principal Global Investors.

“I think with this latest [inflation] number the Fed is really going to go for it and this will cause an economic slowdown,” added 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 debt 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 instrument fell.

Italian stocks and bonds also remained under pressure after the European Central Bank last week paved the way for its first interest rate rise in more than a decade.

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.

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.