US equities fell sharply at the start of trading on Monday with the benchmark S&P 500 opening in bear market territory as sales triggered by high inflation and the prospect of aggressive central bank tightening surged across global financial markets.
The Wall Street S&P 500 index fell 2.4 percent, pushing it more than 20 percent below a record high in January, a decline commonly identified as a bear market. The benchmark for US equities had briefly entered a bear market in late May, before picking up again.
The technology-heavy Nasdaq Composite fell 2.9 percent, taking the loss for the year to about 30 percent. Speculative corners of the market have suffered acutely this year as central banks in the US and Europe begin to raise interest rates and drain liquidity from the financial system.
Bitcoin, the cryptocurrency that tends to respond to broader market sentiment, traded below $ 24,000, having fallen nearly 20 percent since Friday.
Analysts have upgraded their forecasts for how far the Federal Reserve will raise interest rates, with some speculating that the US Federal Reserve may implement an extra large increase of 0.75 percentage points at its monetary policy meeting this week.
US consumer price inflation reached an unexpectedly high annual rate of 8.6 percent in May, data showed on Friday, when Russia̵[ads1]7;s invasion of Ukraine increased fuel and food costs. The money markets are now pricing a 3.4 per cent Fed funds interest rate by December, up from a range of 0.75 per cent to 1 per cent at present.
‘I’m thinking of the latter [inflation] The Fed is really going to go for it, and this will lead to an economic downturn, says Julian Howard, senior investment director for multi-asset solutions at fund manager GAM. “It all looks pretty ugly in the short term, and there is nowhere to run from it, except to go into cash for now.”
The yield on the benchmark index for 10-year government bonds, which support global borrowing costs, rose above 3.29 per cent to reach its highest level since 2011 when the price of the instrument fell. The two-year government interest rate, which follows interest rate expectations, rose 0.17 percentage points to 3.23 per cent.
The US investment bank Goldman Sachs on Monday raised its Fed policy forecasts to include increases of 0.5 percentage points this week and again in July, September and November, with further quarter-point gains in December and January.
“There is very little chance that the Fed will swing to support the financial markets before there is a trend of very meaningful economic disappointments,” said Seema Shah, chief strategist at Principal Global Investors.
Barclays analysts predicted a 0.75 percentage point increase this week. Standard Chartered strategists said in a research note that they “would not rule out” this result.
In Europe, the Stoxx 600 stock index fell 2.1 percent, putting it on track for its fifth straight session with a fall. The regional share meter has fallen more than 9 percent this quarter.
The interest rate on Italy’s 10-year bond rose 0.19 percentage points to 3.94 percent, having more than quadrupled since mid-December. This came after the European Central Bank last week paved the way for its first interest rate hike in more than a decade.
The pound fell 1.1 percent against the dollar to below $ 1.22, depressed by the strengthening of the US currency and concerns about the British economy.
Economists see the Bank of England raising its key lending rate by 0.25 percentage points on Thursday, with an increasing chance of a 0.5 percentage point increase, and escalating fears of stagflation.
Elsewhere, the yen hit a lows of 24 years at $ 135.19 per dollar as traders focused on the Bank of Japan continuing to defy the global trend of higher interest rates. An FTSE index for Asian equities outside Japan fell 2.8 percent.