Shares drop as ‘higher-for-longer’ rate outlook rattles investors

LONDON  -Global shares fell on Monday, extending last week’s slide as central banks reinforced the message that interest rates would stay higher for longer, while investors braced for high-stakes U.S. inflation data on Friday.

Last week brought a mixed bag for investors.

On the one hand, the likes of the European Central Bank and the Bank of England signaled they might not raise rates again. On the other, the Federal Reserve kept rates unchanged, but Chair Jerome Powell made it very clear the soft landing that many investors are banking on was not his base-case scenario.

READ: Global central banks unite in ‘higher for longer’ credo

The MSCI All-World index, which is heading for its worst monthly performance this year, with a 3.6-percent drop, was down 0.2 percent on the day.

U.S. 10-year Treasury yields have nudged at 4.5 percent for the first time since October 2007, and on Monday were up 5 basis points at 4.491 percent, set for their largest monthly rise in a year, reflecting investor unease over the economic outlook.

“It’s not about the fact that the 10-year is over 4.5 percent – whatever the number is, you get this feeling in the market the pain threshold is getting closer. That is the story,” said Frederik Ducrozet, head of macroeconomic research at Pictet Wealth Management.

So far, investors have been pleasantly surprised by how well equity-market performance and valuations have held up, Ducrozet said, particularly in the tech sector, and how much resilience the U.S. economy has displayed in the face of almost two years of rate rises.

But cracks are starting to appear, just as the oil price is edging toward $100 a barrel and stocks beyond the tech sector are struggling to make much upward headway, he added.

READ: Will oil hit $100 a barrel? It already did in some markets

“This is all happening at a moment where this resilience is coming to an end. We were already expecting substantial weakness to materialize in the U.S. economy – it’s happened already in Europe – and on top of that you have the cocktail of shocks coming that Powell mentioned last week,” he added.

The autoworkers’ strike, a possible government shutdown, the resumption of student loan repayments, higher energy prices, and higher long-term borrowing costs are among the risks that Powell noted in a press conference last week.

Futures on the S&P 500 and the Nasdaq 100 were down 0.1 percent, erasing gains made earlier after Hollywood’s writers union reached a preliminary labor agreement with major studios.

Fragile China

The sluggish Chinese economy is adding another layer of caution for investors.

Ratings agency S&P on Monday lowered its forecast for Chinese growth to 4.8 percent in 2023 from 5.2 percent, and to 4.4 percent in 2024 from 4.8 percent, and said fiscal and monetary stimulus had been limited so far.

Chinese shares fell after a rebound on Friday, driven by concerns about the property market. On Sunday, embattled developer Evergrande said it was unable to issue new debt due to an ongoing investigation into its main Chinese subsidiary.

A week-long national holiday starting on Friday made for jittery trading.

READ: Asian shares slip after brutal central bank week, yen in focus

The dollar index got a boost from the rise in Treasury yields, rising 0.1 percent on the day. It logged a 10th straight week of gains last week, its longest such stretch since 2014, as investors rushed to ditch their bets on the Fed cutting rates next year.

“What’s driven the move this year is the acceptance that inflation shock isn’t transitory, but is going to require restrictive monetary policy for much longer than we first thought,” said Andrew Lilley, chief rates strategist at Barrenjoey.

Much will depend on U.S. data. U.S. business activity was basically at a standstill in September, as the services sector essentially idled at its slowest pace since February.

The Fed’s favored inflation gauge, the core Personal Consumption Expenditures Price Index, is due on Friday and may help shape expectations for the Fed’s November meeting.

In the currency markets, the yen hovered near the 150-per-dollar mark, the level many traders believe could represent a line in the sand for the Bank of Japan to intervene. The BOJ last week maintained its ultra-loose monetary policy.

Governor Kazuo Ueda, in a speech on Monday, reiterated the central bank’s resolve regarding interest rates and said there was “very high uncertainty” over whether companies would continue raising prices and wages.

The yen was last at 148.625 per dollar, narrowly above the 10-month low of 148.660 struck earlier.

Oil rose on Monday, nearing 10-month highs. Brent crude futures rose 0.2 percent to $93.48 a barrel, while West Texas Intermediate rose 0.1 percent to $90.16.