LONDON - World stock markets and oil prices hit the skids on Wednesday as the persistent palpitations about rising interest rates and recessions struck again, while the Japanese yen hit a fresh 24-year low against a seemingly unstoppable U.S. dollar.
Enthusiasm that had given Wall Street its best day in a month on Tuesday was suddenly gone as Europe suffered a 1.5% morning drop and Brent crude prices plunged 4% following what had also been a downbeat Asian session.
Fired-up dollar bulls weren't taking any prisoners in the FX markets either on bets that the head of the Federal Reserve, Jay Powell, will reiterate to Washington later the need to jack up U.S. rates hard and fast.
As well as pounding the yen down again, it knocked the euro back 0.3%, Norway's oil-sensitive crown 1.3% and Britain's pound 0.7% as data confirmed inflation there is now running at a 40-year high of 9.1%.
"It is remarkable how quickly the market has turned again after that little squeeze up in sentiment yesterday," said Saxo Bank FX strategist John Hardy.
"The commodity market seems to be calling a (global) recession," he added. "And the dollar is pivoting to strength as a safe-haven".
Those recession worries were also showing in the bond markets where U.S. and German government bonds rallied as traders sought out traditional safe harbours.
The yield, which moves inverse to price, on benchmark U.S. 10-year Treasuries fell to 3.21% and Germany's 10-year yield dropped 10 basis points (bps) to 1.65%, having hit its highest since January 2014 at 1.928% last week.
Nevertheless the spreads between Germany and highly-indebted Italy widened again as Luigi Di Maio, Rome's foreign minister in a complex coalition government, said he was leaving the 5-Star Movement to form a new parliamentary group, a move that threatens to bring fresh instability to Prime Minister Mario Draghi.
Wall Street futures were down well over 1% meaning the S&P 500 looked set to consolidate what could be its worst start to a year since 1932, although Deutsche Bank Jim Reid was trying to see the positive side.
"The 5 worst H1 performances for the S&P 500 before this year, all saw very good H2 performances," he said, pointing out that on four of those five occasions, the U.S. index went on to gain at least 17%.
"In order of H1 declines, we saw 1) 1932: H1 -45%, H2 +56%, 2) 1962: H1 -22%, H2 +17%, 3) 1970: H1 -19%, H2 +29%, 4) 1940: H1 -17%, H2 +10%, 5) 1939: H1 -15%, H2 +18%," Reid showed.
Overnight, MSCI's broadest index of Asia-Pacific shares outside Japan slumped 2.3% to close to a five-week low. Heavyweight Hong Kong-listed tech firms plunged over 4% although Tokyo's Nikkei managed to keep its losses to just 0.4%.
Investors are continuing to assess how worried they need to be about central banks potentially pushing the world economy into recession as they attempt to curb red hot inflation with interest rate increases.
The main U.S. share benchmarks rose 2% overnight on the possibility the economic outlook might not be as dire as thought during trade last week when MSCI's main global stocks index logged its biggest weekly percentage decline since March 2020.
"I think that this recent post-holiday bear market rally is a reflection of the uncertainty that investors have regarding whether we have seen the peak of inflation and Fed hawkishness or not – I think we're close," said Invesco global market strategist for Asia Pacific David Chao.
U.S. Federal Reserve chair Jerome Powell is due to start his testimony to Congress on Wednesday with investors looking for further clues about whether another 75-basis-point rate hike is on the cards in July.
Economists polled by Reuters expect the Fed will deliver a 75-basis-point interest rate hike next month, followed by a half-percentage-point rise in September, and won't scale back to quarter-percentage-point moves until November at the earliest.
Most other global central banks are in a similar situation, apart from the Bank of Japan, which last week pledged to maintain its policy of ultra-low interest rates. In contrast, the Czech central bank was expected to hike its rates by as much as 125 bps later with inflation there well into double figures.
That gap between low interest rates in Japan and rising U.S. rates has weighed on the yen, which hit a new 24-year low of 136.71 per dollar in Asian trading, before drifting firmer to 136.20.
Minutes from the Bank of Japan's April policy meeting released Wednesday showed the central bank's concerns over the impact the plummeting currency could have on the country's business environment.
The other big move was in commodity markets. The 4% slump in oil prices came amid all the recession angst and with U.S. President Joe Biden expected to call later for a temporary suspension of the 18.4-cents a gallon federal tax on gasoline, a source briefed on the plan told Reuters.
Brent dropped $5 to $109.79 a barrel, while U.S. crude fell 5.9% or $5.37 to $104.15. Metals buckled too with copper, nickel, aluminium and tin all down between 2.9% and 5.2%
"The latest in a long line of attempts to temper surging prices at the pumps is having the desired effect," said PVM's Stephen Brennock, talked about oil and pointing to an expected summer demand surge.
"Yet whether this knee-jerk reaction will stand the test of time is by no means guaranteed".
(Additional reporting by Sam Byford in Tokyo and Shadia Nasralla in Bengaluru, Editing by William Maclean)