Global equities experienced a sell-off on Tuesday, as investors anticipated an extended period of high interest rates. This led to a strengthening of the US dollar and a continuation of elevated Treasury yields. The S&P 500 fell 1.1%, while the Nasdaq Composite reached its lowest level since June. Tech stocks, which are particularly sensitive to high interest rates, were among the major decliners, with Microsoft, Apple, and Amazon all experiencing losses. European equities also saw losses, with the Stoxx Europe 600 falling 0.5% and the Dax closing at its lowest level since March.
Asian markets were also affected, as Hong Kong’s Hang Seng index dropped 1.5%, and China’s CSI 300 and Japan’s Topix both experienced a 0.6% decline. The recent surge in government bond yields in both the US and Europe has been driven by hawkish statements from central bank officials, indicating that borrowing costs will remain elevated for a longer period than previously expected. The yields on 10-year US Treasuries and German Bunds remained near their highest levels since 2007 and 2011, respectively.
As investors anticipate the possibility of high interest rates, the dollar rose by 0.1% against a basket of six peer currencies. This rise aligns with expectations of tight monetary policy. Mark Haefele of UBS Global Wealth Management commented on the situation, stating that the equity market has been too aggressive in pricing in rate cuts and strong economic growth. Instead, Haefele suggests a preference for fixed income investments given the prospect of weaker growth as rates are kept higher for longer.
Investors are now focusing on preliminary inflation data for the eurozone, which is expected to show a drop in annual consumer prices. Christine Lagarde, president of the European Central Bank, reiterated that rates in the eurozone will remain high to bring inflation back to the 2% target, even as economic activity slows. The recent rise in oil prices has further complicated the situation, potentially worsening the economic slowdown while also pushing up inflation. Supply cuts by leading oil producers have contributed to a nearly 30% increase in oil prices since June.