The dollar rose on Monday, as investors took their cues directly from the central banks and prepared themselves for a long period of high US rates.
The yield of the benchmark 10-year US Treasuries increased by 0.10 percentage points, reaching 4.54 percent, its highest level in sixteen years. Meanwhile, that of the 30-year notes rose by 0.14 percentage points, to 4.66 percent, the highest since 2011.
In Europe, the 10-year German Bund yield, which is the regional benchmark, has also risen to 2,81 percent, its highest level ever. Bond yields increase as bond prices decline.
Central banks have suggested that the global cycle of rising interest rates is coming to an end. However, they also signalled that interest rates will need to remain high in order to curb inflation. Last week, the US Federal Reserve held interest rates to their highest level for 22 years. However, it published projections that showed fewer rate reductions in 2024 than had been predicted by markets.
UBS analysts wrote Monday: “We’ve long believed that the equity markets have been too aggressive when pricing in rate reductions.” “A Fed that is data-dependent has no reason to be soft on inflation.”
Others have left the door wide open for future rate hikes. Chicago Fed President Austan Goolsbee said on Monday that above-target inflation was a greater threat to the economy.
Tom Hopkins, Portfolio Manager at BRI Wealth Management, said that many market participants had been investing on the assumption that rates would fall shortly after reaching their peak. The labour market is tight and economies are resilient, so it’s more likely that rates will remain at current levels or near them well into the next year.
The dollar index (a measure of greenbacks against six other currencies) rose by as much as 0.5%, surpassing the previous high reached during the regional banking crisis in March. It also hit its highest level since last November. Wall Street’s benchmark S&P 500 closed 0.4 per cent higher, led by the energy and materials sectors, and the tech-heavy Nasdaq Composite advanced almost 0.5 per cent.
In Europe, Stoxx Europe 600 dropped 0.6 percent and Germany’s Dax fell 1 percent. On Monday, the downturn began in China. Hong Kong’s Hang Seng fell by 1.8 percent and the CSI300 dropped by 0.7 percent due to declines in Hong Kong’s once dominant property sector.
The news that Chinese property company Evergrande was unable to issue new debt due to an investigation of its principal subsidiary, Hengda Real Estate Group, shook the Asian markets. The shares of the Chinese property giant dropped by more than five percent two days after Evergrande announced that it would cancel some creditor meetings in order to reevaluate terms for its restructuring.
Longfor, a developer, lost 6.5 percent, while Country Garden dropped 7.7 percent. Hong Kong’s Hang Seng Properties Index lost 4.2 percent.
China’s real estate sector, which accounts for over a quarter in the second largest economy of the world, has been struggling since the beginning of the year, as the consumer demand struggles to recover following three years of severe restrictions due to the pandemic coronavirus.
Investors will be awaiting data this week on the inflation rate in the eurozone in order to gauge policymakers’ intentions for future rates. Recent oil supply cuts are causing concern that they could cause a global second wave of inflation.