World stocks plummeted again on Thursday and government bonds hovered at multi-year highs after a series of rate rises from global central banks rekindled fears that aggressive policy tightening could drag economies into recession.
Following a relief rally on Wednesday when investors welcomed the U.S. Federal Reserve’s aggressive move to raise rates by 75 basis points – its biggest rate hike since 1994 – by buying shares, two other spates of policy tightening in Britain and Switzerland seemed to have sobered investors into refocusing on the chance that economies could slow as rates rise.
“Can the economy take it? So far, leading indicators show good readings, but we remain wary of a consumer strike,” said Giuseppe Sette, president of the quantitative research firm Toggle.
By midday, MSCI’s gauge of stocks across the globe had slumped 2.32% to a new 19-1/2-month low, and the pan-European STOXX 600 index lost 2.47%.
In New York, the Dow Jones Industrial Average dropped 2.5%, the S&P 500 shed 3.3% and the Nasdaq Composite slumped 4%. All three indices were trading at their lowest in at least 1-1/2-years.
The dollar, which has benefited from rising U.S. yields, flagged on Thursday, weighed in part by the Swiss franc, which surged after the Swiss National Bank surprised investors earlier in the day by raising interest rates for the first time in 15 years by 50 basis points.
The Bank of England (BoE) also lifted rates on Thursday for a fifth time since December by 25 basis points, a day after the European Central Bank promised support to temper a bond market rout fueled by hawkish expectations.
By 1629 GMT (1229 EDT), the Swiss franc had soared 2.9%, its biggest one-day gain in seven years. A stronger Swiss franc dragged the dollar index down 1% to 103.73, pulling it from a 20-year high of 105.79 struck on Wednesday.
“There’s a lot of nervousness. After the initial relief to the Fed … markets seem to have woken up that it is still a 75 basis point rate hike,” said Giuseppe Sersale, strategist and portfolio manager at Anthilia in Milan.
“If even the Swiss central bank surprisingly raises by half a point, clearly investors imagine that the tightening of central banks is still very violent. There is very little to be cheerful about,” Sersale added.
Swiss stocks were close to confirming a bear market pattern, having fallen about 19% since a Jan. 3 closing high.
Britain’s top FTSE 100 equity benchmark slumped 3.14% following the BoE’s rate hike, which confounded some forecasts of a bigger move.
“Once again the BoE looks like the timid cat next to the Fed’s roar against inflation. … A 6-3 vote on 25 bps means that the sterling bulls will have little to back up any attempt to push the pound higher against the dollar,” said Chris Beauchamp, chief market analyst at IG Group in London.
Sterling initially plunged after the BoE’s rate announcement, but recovered in New York trade to be up 1.7% at $1.2389.
