Stocks fall, dollar firms on recession worries

  • Fear of rising inflation fuels risk aversion
  • Vote cautious ahead of Powell speech in Jackson Hole
  • Dollar continues to rise, bond yields also rise
  • China cuts lending rate, lowest yuan since September 2020

NEW YORK, Aug. 22 (Reuters) – US stocks fell sharply and the dollar rose Monday as fears mounted that the central bank’s efforts to contain rising consumer prices with inflation-lowering rate hikes will weaken the global economy and lead to a recession.

Earlier in Europe, the benchmark STOXX index (.STOXX) for regional stocks closed 1% after Russia’s Gazprom (GAZP.MM) said it would halt natural gas supplies to Europe for three days at the end of the month. read more

Oil initially fell 4% as traders bet that a slowdown would reduce demand. But Europe’s latest energy supply disruption raised concerns about the continent’s economic prospects following aggressive signals from European Central Bank policymakers. Russia’s natural gas supply to Europe is declining by about 75% year-on-year.

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A closely watched recessionary signal — the inversion of the US Treasuries yield curve — broadened as the market braced itself for Friday’s comments from Federal Reserve Chair Jerome Powell, who in Jackson Hole, Wyoming, is part of the Fed’s mission to curb inflation. will discuss lowering.

The dollar strengthened, pushing the euro below parity at 0.9944 and the Canadian dollar surpassing 1.30 against the greenback. The strong dollar pushed the gold price to its lowest level in nearly four weeks.

“Ahead of Jackson Hole, the dollar will remain relatively solid even if it is overextended,” said Marc Chandler, chief market strategist at Bannockburn Global Forex.

Despite a rapid shift towards a more aggressive view of the Fed, “the market has a habit of viewing Powell as dovish. So I see the risk of ‘buy the rumor’ – the rumor of an aggressive Fed – and sell it then ‘on the fact'”, he said.

Fed futures now estimate a 54.5% chance of a 75 basis point increase by the Fed in September, rather than the greater probability of a 50 basis point increase as the market had expected into the weekend.

A Reuters poll of economists from Aug. 16-19 predicted that the Fed will raise interest rates by 50 basis points in September, with risks skewed toward a higher peak. read more

The Treasury yield curve, which measures the difference between two- and 10-year bond yields, returned to -29.7 basis points after easing slightly last week, a sign that recession betting has increased.

“The inverted yield curve indicates that a massive ‘recession’ is on the way,” said Tom di Galoma, managing director at Seaport Global Holdings, in a note to investors. “Yield curve inversions are great predictors of recessions.”

The Dow Jones Industrial Average (.DJI) closed 1.91% lower, the S&P 500 (.SPX) lost 2.14% and the Nasdaq Composite (.IXIC) fell 2.55% as all 11 of the major S&P 500 sectors declined.

The number of declining shares surpassed those by more than 5:1 on the New York Stock Exchange.

The S&P 500 has repeatedly failed to hit its 200-day moving average around 4.320, a sign that it would pull out of a bear market.

The 10-year bond rose 4 basis points in price to yield 3.0294%.

An exception to the tightening trend is China, where the central bank cut some key lending rates by 5 to 15 basis points on Monday to support a slowing economy and a stressed housing sector. read more

Unrest over the Chinese economy pushed the yuan to its 23-month low, while inventories across the region came under pressure.

MSCI’s broadest index of Asia-Pacific stocks outside Japan (.MIAPJ0000PUS) fell 0.97%, while the US-focused index of stocks around the world (.MIWD00000PUS) fell 1.8%.

German 10-year bond yields hit a new four-week high of 1.314% as a key measure of long-term inflation expectations in the eurozone hit a two-month high of 2.207%.

The ECB must continue to raise interest rates even as a recession in Germany becomes increasingly likely, as inflation will remain uncomfortably high until 2023, Bundesbank president Joachim Nagel said this weekend.

Oil prices bounced from session lows and traded almost flat in a volatile session after Saudi Arabia’s energy minister said the Organization of the Petroleum Exporting Countries and its allies could cut production to meet market challenges .

US crude futures fell 54 cents to reach $90.23 a barrel, while Brent fell 24 cents at $96.48.

US gold futures fell 0.8% to $1,748.40 an ounce.

Bitcoin was down 1.94% at $21,096, weighed down by broad risk aversion in markets.

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Reporting by Herbert Lash in New York Additional reporting by Lawrence White and Wayne Cole Editing by Catherine Evans and Matthew Lewis

Our Standards: The Thomson Reuters Trust Principles.

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