US stocks dropped sharply into bear market territory on Monday, rattled by worries about high inflation and the prospect of aggressive monetary tightening by central banks.
Wall Street’s benchmark S&P 500 index slid 3.1 per cent at midday in New York, pushing it more than 20 per cent from its recent all-time high, a decline commonly identified as a bear market. The index briefly flirted with a bear market in late May before rebounding the same day.
Government bond prices on both sides of the Atlantic also dropped dramatically, with yields hitting the highest levels in over a decade, as strong inflation readings prompt central banks in the US and Europe to raise interest rates and drain liquidity from the financial system.
Speculative corners of the market including fast-growing tech companies and crypto assets have suffered acutely. The tech-heavy Nasdaq Composite dropped 3.8 per cent, taking its losses for the year above 30 per cent.
Bitcoin traded below $24,000, having tumbled almost 20 per cent since last Friday. The decline was exacerbated by news that two big players in the crypto market had halted customer withdrawals due to the extreme market conditions.
If the S&P 500 does not recover by the end of the day, it will mark the first time the benchmark index has fallen more than 2 per cent in three consecutive sessions since August 2015.
The latest bout of selling was encouraged by unexpectedly high US inflation figures released this past Friday, which showed consumer prices rose 8.6 per cent year on year in May as Russia’s invasion of Ukraine raised fuel and food costs.
Analysts have upgraded their forecasts of how far the Federal Reserve will raise interest rates, with some speculating the central bank might implement an extra large 0.75 percentage point increase at its monetary policy meeting this week.
Money markets are now pricing in a 3.4 per cent federal funds rate by December, up from a range of 0.75 per cent to 1 per cent currently.
“I think with this latest [inflation] number, the Fed is really going to go for it and this will cause an economic slowdown,” said 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.”
The yield on the benchmark 10-year Treasury note, which underpins global borrowing costs, rose 0.14 percentage points to 3.30 per cent, its highest level since 2011. Higher yields reflect lower prices. The two-year Treasury yield, which tracks interest rate expectations, rose 0.17 percentage points to 3.22 per cent.
US investment bank Goldman Sachs on Monday raised its Fed policy forecasts to include 0.5 percentage point increases this week and again in July, September and November, with 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.
Analysts at Barclays predicted a 0.75 percentage point increase this week. Standard Chartered strategists said, in a research note, that they would “not preclude” this outcome.
In Europe, the Stoxx 600 share index dropped 2.4 per cent, its fifth straight session of falls. The regional share gauge has dropped more than 9 per cent this quarter.
The yield on Italy’s 10-year bond rose 0.23 percentage points, hitting 4 per cent for the first time since 2014, having more than quadrupled since mid-December. This came after the European Central Bank last week paved the way for its first interest rate rise in more than a decade.
The pound fell 1.3 per cent against the dollar to less than $1.22, depressed by a strengthening US currency and concerns about the UK economy.
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.
Elsewhere, the yen touched a 24-year low of ¥135.19 per dollar as traders bet on the Bank of Japan continuing to defy the global trend towards higher interest rates. A FTSE index of Asian shares outside Japan fell 2.8 per cent.