US stocks slid sharply at the start of trading on Monday with the benchmark S&P 500 opening in bear market territory, as a sell-off sparked by high inflation and the prospect of aggressive central bank tightening rippled across global financial markets.
Wall Street’s S&P 500 index fell 2.4 per cent, pushing it more than 20 per cent below an all-time high set in January, a decline identified commonly as a bear market. The gauge of US stocks had briefly entered a bear market in late May, before rebounding off its lows.
The tech-heavy Nasdaq Composite dropped 2.9 per cent, taking its losses for the year to roughly 30 per cent. Speculative corners of the market have suffered acutely this year as central banks in the US and Europe begin to raise interest rates and drain liquidity from the financial system.
Bitcoin, the cryptocurrency that tends to react to broader market sentiment, traded below $24,000, having tumbled almost 20 per cent since Friday.
Analysts have upgraded their forecasts of how far the Federal Reserve will raise interest rates, with some speculating that the US central bank might implement an extra large 0.75 percentage point increase at its monetary policy meeting this week.
US consumer price inflation hit an unexpectedly high annual rate of 8.6 per cent in May, data on Friday showed, as Russia’s invasion of Ukraine raised fuel and food costs. Money markets are now pricing in a 3.4 per cent fed funds rate by December, up from a range of 0.75 per cent to 1 per cent currently.
“I think with this latest [inflation] number the Fed is really going to go for it and this will cause an economic slowdown,” said Julian Howard, lead investment director for multi-asset solutions at fund manager GAM. “It’s all looking pretty ugly in the short term and there is nowhere really to escape from it, apart from going into cash for now.”
The yield on the benchmark 10-year Treasury note, which underpins global borrowing costs, rose above 3.29 per cent to hit its highest level since 2011 as the price of the instrument fell. The two-year Treasury yield, which tracks interest rate expectations, rose 0.17 percentage points to 3.23 per cent.
US investment bank Goldman Sachs on Monday raised its Fed policy forecasts to include 0.5 percentage point increases this week and again in July, September and November, with further quarter-point rises in December and January.
“There is very little chance of the Fed pivoting to support financial markets until there is a trend of very meaningful economic disappointments,” said Seema Shah, chief strategist at Principal Global Investors.
Analysts at Barclays predicted a 0.75 percentage point increase this week. Standard Chartered strategists said, in a research note, that they would “not preclude” this outcome.
In Europe, the Stoxx 600 share index dropped 2.1 per cent, putting it on track for its fifth straight session of falls. The regional share gauge has dropped more than 9 per cent this quarter.
The yield on Italy’s 10-year bond rose 0.19 percentage points to 3.94 per cent, having more than quadrupled since mid-December. This came after the European Central Bank last week paved the way for its first interest rate rise in more than a decade.
The pound fell 1.1 per cent against the dollar to less than $1.22, depressed by a strengthening US currency and concerns about the UK economy.
Economists see the Bank of England lifting its main borrowing rate by 0.25 percentage points on Thursday, with an increasing chance of a 0.5 percentage point rise, escalating fears of stagflation.
Elsewhere, the yen touched a 24-year low of ¥135.19 per dollar as traders bet on the Bank of Japan continuing to defy the global trend towards higher interest rates. A FTSE index of Asian shares outside Japan fell 2.8 per cent.