Global stock markets tumbled on Tuesday, September 26, 2023, as investors grew increasingly concerned that the US Federal Reserve would raise interest rates again and keep them elevated for a prolonged period to tame inflation.
The sell-off was broad-based, with most Asian and European bourses closing in the red. Wall Street was also down through morning trade.
US Treasury yields jumped to fresh 16-year highs, reflecting investors' expectations for higher rates and increased demand for safe-haven assets.
The concerns were compounded by the threat of a government shutdown in Washington, as lawmakers struggled to iron out their differences on spending. This led to a warning from ratings agency Moody's that such a scenario could have negative implications for the US credit rating.
The haven dollar hit multi-month peaks against the pound, euro, and yen, as investors flocked to safety. The Dollar Index reached its highest level since November before steadying.
Survey data released on Tuesday showed that US consumer confidence fell in September, extending a slump from August, amid concerns about rising prices.
An increase in oil prices pushed up energy costs in the United States over the summer, and inflation along with it, causing more headaches for the Fed in its efforts to slow price increases through interest rate hikes.
Oil also retreated earlier on Tuesday on profit-taking and as the impact of a strong dollar sapped demand, before resuming its climb.
Investors Fear Recession
Investors fear that keeping rates high for too long, or hiking them again, could tip economies into recession.
"Concerns over high interest rates lingering for longer causes nervousness," noted Susannah Streeter, head of money and markets at stock broker Hargreaves Lansdown.
"Restrictive monetary policy in major economies, particularly the US, (reduces) appetite for goods and services, as consumers and companies keep their belts tightened," she added.
Focus on China and Washington
Investors are also keeping a wary eye on developments in China, as the troubled property sector comes back into focus after indebted developer Evergrande said it had missed an onshore bond repayment.
The firm had earlier announced that it would have to revisit its much-anticipated restructuring, citing weaker-than-expected sales, and scrapped a meeting of creditors.
Squabbling in Washington is also causing some discomfort among investors, as hardline Republicans in the House of Representatives block key spending bills. The standoff — which could cause a government shutdown if an agreement is not reached by the weekend — led Moody's to warn that such a scenario would have negative implications for the country's top-tier credit rating.
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The sell-off in global stock markets on Tuesday is the latest sign that investors are becoming increasingly nervous about the outlook for the global economy. The Fed's aggressive rate hikes, the threat of a recession, and the ongoing war in Ukraine are all taking a toll on risk sentiment.
It is important to note that the stock market is a forward-looking asset class, and investors are already pricing in the possibility of a recession. However, if the economic downturn is more severe than expected, it could lead to further losses in equity markets.
Investors should carefully consider their risk tolerance and investment objectives before making any decisions. Those who are concerned about the current market environment may want to reduce their exposure to equities and increase their allocation to defensive assets, such as bonds and cash.
