Global risk assets tumble as pressure on UK mounts

Bloomberg

Global risk assets extended their selloff on Monday as fears of faster inflation and global recession continued to rise.
UK markets were in focus as the pound crashed to an all-time low and bond yields surged to the highest in more than a decade, sparking talk of emergency action by the Bank of England. The market mayhem unleashed by the government’s fiscal plan went into overdrive after the government pledged further tax cuts.
An index of global stocks traded near the lowest since 2020, while US futures dropped on fears that Federal Reserve rate hikes to combat persistently elevated inflation will hurt the economy. European equities extended declines after sliding into a bear market on Friday, with mining and energy stocks underperforming as metals and oil falls.
“We’re in a period of global gloom, with pessimism blanketing different countries for different reasons,” said Ed Yardeni, president of his eponymous research firm, who warned of growing storm clouds for the US economy. “The latest data jibe with our growth recession scenario, but the risks of a full-blown recession are obviously increasing,” he wrote in a note on Monday.
Currency traders are finding developed markets trickier to navigate than their emerging counterparts.
Sterling dropped to as low as $1.0350, taking it closer to parity with the dollar, though it subsequently pared its loss to about $1.07. The plunge in the UK gilts has sent 10-year yields above 4% for the first time since 2010.
The euro fluctuated as investors weighed the prospects of Italy under the most right-wing government since World War II. Giorgia Meloni struck a conciliatory tone after her election win and traders were far more concerned about the UK meltdown anyway.
Geopolitical risks from the war in Ukraine to escalating tensions over Taiwan and unrest in Iran also weighed on sentiment. Meanwhile, the OECD cut almost all growth forecasts for the Group of 20 next year while anticipating further interest-rate hikes, and a gauge of German business confidence deteriorated.
Treasuries extended their worst bond slide in decades as a dollar gauge rose to yet another record. The currency’s rally is “untenable” for risk assets, according to a note by Morgan Stanley strategists led by Michael Wilson.
In Asia, the yen weakened through 144 to the greenback, while remaining short of the point last week that drew intervention from Japanese authorities. The yuan falls for a sixth day in the longest losing streak in three years, even as China said it would raise the risk-reserve requirement to increase the cost for shorting the currency.
“It’s a king US dollar,” Sian Fenner, senior Asia economist for Oxford Economics, said on Bloomberg TV. “It’s adding to inflationary pressures and more central banks raising rates more than we have historically seen.”
Trading this week will be punctuated by a number of economic reports including US initial jobless claims and gross-domestic-product data, along with PMI figures from China. Choppiness in price moves is likely with a steady stream of Federal Reserve officials speaking through the week.
Underscoring the concern in markets, the Cboe Volatility Index, which serves as a “fear gauge” for Wall Street, jumped to a three-month high.