Global financial markets took a sharp nosedive on Tuesday as investors grew increasingly anxious about the possibility of another interest rate hike in the United States. Concerns were compounded by worries that these elevated rates might persist to combat stubbornly high inflation.
Despite a brief rebound on Wall Street, early Asian trading saw the dollar strengthen even further, driven by a surge in US Treasury yields to their highest levels in 16 years. This development reignited fears that the world’s largest economy could slip into a recession.
Adding to the uncertainty, lawmakers in Washington struggled to reach an agreement on spending, raising the specter of a government shutdown. This political deadlock prompted warnings that it could negatively impact the US credit rating. The recent surge in oil prices further fueled concerns that central banks’ efforts to curb inflation might be derailed after over a year of tightening measures.
Last week, the US Federal Reserve indicated that it could raise borrowing costs once again before the year’s end. This announcement dealt a blow to many market participants who had hoped that the interest rate hike in July would be the last for a while. Additionally, policymakers hinted that rates might need to remain at their highest levels in over two decades for an extended period.
Market analysts from the BlackRock Investment Institute believe that “rates will stay high” and that Treasury yields could continue to climb. They suggest that rising long-term bond yields reflect the market’s adjustment to increased macro and market volatility. The prevailing sentiment, as noted by National Australia Bank’s Tapas Strickland, is that rates will remain elevated for an extended period, reflecting the Federal Reserve’s stance.
In early Asian trading, major stock markets including Tokyo, Hong Kong, Shanghai, Seoul, Singapore, Sydney, Taipei, and Wellington all experienced declines, reflecting the uncertainty gripping investors. The situation in China’s property sector also raised concerns, with the troubled developer Evergrande announcing that it had missed an onshore bond repayment.
On the currency front, the dollar remained near 11-month highs against the yen, prompting Japanese authorities to express their willingness to intervene if the dollar’s ascent becomes excessive. However, analysts do not anticipate a significant strengthening of the yen, given the Bank of Japan’s commitment to its ultra-loose monetary policy.
The ongoing political standoff in Washington, where hardline Republicans in the House of Representatives have blocked key spending bills, is causing unease among investors. If an agreement is not reached by the weekend, it could lead to a government shutdown, a scenario that Moody’s warns would have negative implications for the US’s top-tier credit rating.
