US stocks fell in a volatile session exacerbated by sharp moves in the UK currency and bond markets, as hawkish central banks across the globe continued to subdue sentiment. 

The S&P 500 ended Monday’s session at its lowest level since December 2020. The Cboe Volatility Index spiked past 30, a level it hasn’t closed above since June. US Treasury yields rose, with the 10-year rate climbing as much as 21 basis points to 3.898 per cent, its highest level since April 2010. 

The Bloomberg Commodity Spot Index, a key gauge for raw materials prices, tumbled to the lowest in eight months as fears of a global recession intensified. The pound dropped after the Bank of England said it may not act before November to stem a rout that took the sterling to a record low. The dollar soared to yet another record high.

Markets were on the edge after a selloff of risk assets deepened last week as the UK’s plan to lift its economy fueled fears that heightened inflation would push rates higher and ignite a global recession. UK markets were in focus on Monday as the pound remained volatile after crashing to an all-time low, with the Bank of England’s comments doing little to reassure traders that were waiting for a broader policy response to the fallout from the goverment’s massive tax cuts.

Federal Reserve officials added to the hawkish rhetoric. On Monday, Boston Fed President Susan Collins said additional tightening is needed to rein in stubbornly high inflation and cautioned the process will require some job losses. Atlanta Fed President Raphael Bostic also said the central bank still has a ways to go to control inflation. 

“On the macro front, it feels like a remake of West Side Story, with a gang of central bankers going after the job market, which refuses to let go,” said Mike Bailey, director of research at FBB Capital Partners. “Powell and now Andrew Bailey at the BOE are trying to slow the economy down, but my sense is employers are keeping as many workers as they can to avoid being left out in the cold when we recover from the next recession. So we almost have an arms race with central bankers raising rates and employers holding on to workers.”

US markets will continue to remain challenged by uncertainty until companies start to report their third-quarter earnings next month, which will provide greater detail on the health of corporate revenues and profit, wrote John Stoltzfus, chief investment strategist at Oppenheimer. Any company or industry that needs lower rates could be in trouble, FBB’s Bailey says. 

Investors will also be keeping an eye on the economic data stream for hints of prices cooling, Art Hogan, chief market strategist at B. Riley, wrote in a note. 

“What the market will need to see now to get out of the current conundrum is for inflation inputs to start coming down noticeably,” said Hogan. “We will get a read on the Fed’s preferred inflation indicator this Thursday when the second quarter core PCE is reported. Along with that investors will keep a close eye on the economic data stream for hints of prices paid coming down.”

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.

U.K. GILTS

The plunge in UK gilts sent 10-year yields above 4 per cent for the first time since 2010. Traders ramped up wagers on the scale of interest-rate hikes in the short term, with money markets pricing in more than 200 basis points of increases by the central bank’s next meeting in November. 

Meanwhile, Christine Lagarde said the European Central Bank will consider shrinking its balance sheet only once it has completed the “normalization” of interest rates. Raising borrowing costs is the most appropriate and effective tool for now to combat record-high euro-area inflation, the ECB President said on Monday. 

Geopolitical risks from the war in Ukraine to escalating tensions over Taiwan and unrest in Iran also continue to weigh on market sentiment. 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. 

Key events this week:

• Fed official Loretta Mester speak at events, Monday
• China industrial profits, Tuesday
• US new home sales, Conference Board consumer confidence, durable goods, Tuesday
• Fed Chair Jerome Powell and Charles Evans speak at events, Tuesday
• Fed’s Mary Daly, Rafael Bostic, Charles Evans and ECB President Christine Lagarde speak at events, Wednesday
• Euro zone economic confidence, consumer confidence, Germany CPI, Thursday
• US initial jobless claims, GDP, Thursday
• Fed’s Loretta Mester, Mary Daly speak at events, Thursday
• China PMI, Friday
• Euro zone CPI, unemployment, Friday
• US consumer income , University of Michigan consumer sentiment, Friday
• Fed’s Lael Brainard and John Williams speak, Friday

Some of the main moves in markets:

Stocks

• The S&P 500 fell 1 per cent as of 4:03 p.m. New York time
• The Nasdaq 100 fell 0.5 per cent
• The Dow Jones Industrial Average fell 1.1 per cent
• The MSCI World index fell 2 per cent

Currencies

• The Bloomberg Dollar Spot Index rose 1 per cent
• The euro fell 0.7 per cent to US$0.9617
• The British pound fell 1.5 per cent to US$1.0697
• The Japanese yen fell 0.9 per cent to 144.56 per dollar

Cryptocurrencies

• Bitcoin rose 1.4 per cent to US$19,173.2
• Ether rose 2.9 per cent to US$1,329.58

Bonds

• The yield on 10-year Treasuries advanced 21 basis points to 3.89 per cent
• Germany’s 10-year yield advanced nine basis points to 2.11 per cent
• Britain’s 10-year yield advanced 42 basis points to 4.24 per cent

Commodities

• West Texas Intermediate crude fell 2.3 per cent to US$76.92 a barrel
• Gold futures fell 1.3 per cent to US$1,633.60 an ounce