(Bloomberg) — The global sell-off in stocks deepened Monday as concerns grew that the Federal Reserve is lagging behind on policy support for a slowing U.S. economy, sending investors into the safety of bonds. Japanese shares tumbled as traders priced in more domestic rate hikes.
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The Topix and Nikkei indexes were on the brink of a bear market, with the former forecast for a three-day decline that would be the worst since the Fukushima meltdown in 2011. The yen rose more than 1.5% against the dollar thanks to bets that the Bank of Japan will continue to raise interest rates.
Stocks in Korea, Taiwan and Australia fell, sending a gauge of regional stocks down the most in four years. Concerns about the US economy pushed government bond yields lower, while spreads on investment-grade dollar bonds in Asia were expected to rise by the most in 22 months. Futures contracts on U.S. stocks also fell in Asian trading.
The price action underlines how quickly sentiment has shifted away from expectations that the Fed can engineer a soft landing for the US economy. Data on Friday showed U.S. nonfarm payrolls showed one of the weakest readings since the pandemic and the unemployment rate unexpectedly rose above the Fed’s year-end forecasts, triggering a closely watched recession indicator.
“It’s a pretty dramatic shift in the narrative, showing how many of the recent trends have been underpinned by expectations of a US soft landing,” said Charu Chanana, head of currency strategy at Saxo Bank A/S. “The more the US soft landing assumption is questioned, the further we could see a pullback in stocks and strategies funded by low-yield currencies whose positioning is massively skewed.”
Bond traders have repeatedly misjudged where interest rates have gone since the end of the pandemic, sometimes overshooting in both directions. Global bonds pared their losses for the year as signs of an economic downturn in the US fueled demand for fixed income.
Japanese 10-year government bond yields fell to their lowest level since April, falling as much as 17 basis points to 0.785% on Monday. The shares of Mitsubishi UFJ Financial Group Inc. posted their biggest intraday decline ever as the fall in bond yields threatened to hit lending margins.
Asian currencies edged higher – led by the Malaysian ringgit – while the Mexican peso’s slump continued as traders continued to unwind carry trades in emerging markets. The sudden appreciation of funding currencies such as the yen and Chinese yuan has damaged the carry trade, where traders typically borrow at lower rates to invest in higher-yielding assets.
In the commodities sector, oil rose Monday amid reports that Iran may attack Israel to avenge the killings of Hezbollah and Hamas officials. Elsewhere, Bitcoin fell more than 10% at one point before recouping some of the decline. Gold went higher.
Main events this week:
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Eurozone PPI, HCOB Services PMI, Monday
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US ISM Services Index, Monday
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Chicago Fed President Austan Goolsbee speaks Monday
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Fed Chair Mary Daly of San Francisco will speak on Monday
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Tariff decision Australia, Tuesday
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Japanese cash earnings, Tuesday
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Philippines CPI, trade, Tuesday
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Eurozone retail sales, Tuesday
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US trade, Tuesday
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Unemployment in New Zealand, Wednesday
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Chinese trade, Wednesday
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Chile copper exports, trade, Wednesday
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US consumer credit, Wednesday
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Elizabeth McCaul, member of the ECB’s Supervisory Board, speaks on Wednesday
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RBA Governor Michele Bullock speaks on Thursday
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Philippines GDP, Thursday
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India interest rate decision, Thursday
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First unemployment claims in the US, Thursday
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Richmond Fed President Thomas Barkin will speak on Thursday
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Chile CPI, Thursday
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CPI Colombia, Thursday
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Mexico CPI, interest rate decision Thursday
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Tariff decision Peru, Thursday
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China PPI, CPI, Friday
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Germany CPI, Friday
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Unemployment Canada, Friday
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Brazil CPI, Friday
Some of the major moves in the markets:
Shares
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S&P 500 futures fell 1.6% as of 1:05 p.m. Tokyo time
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Nikkei 225 futures (OSE) fell 6.8%
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Japan’s Topix fell 7.5%
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Australia’s S&P/ASX 200 fell 2.9%
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Hong Kong’s Hang Seng fell 0.2%
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The Shanghai Composite had changed little
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Euro Stoxx 50 futures fell 0.6%
Currencies
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The Bloomberg Dollar Spot Index fell 0.1%
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The euro rose 0.2% to $1.0931
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The Japanese yen rose 1.5% to 144.37 per dollar
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The offshore yuan rose 0.5% to 7.1311 per dollar
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The Australian dollar fell 0.2% to $0.6500
Cryptocurrencies
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Bitcoin fell 8.8% to $53,956.51
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Ether fell 15% to $2,327.53
Bonds
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The yield on ten-year government bonds fell by two basis points to 3.77%
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The Japanese ten-year yield fell by 13 basis points to 0.825%
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The Australian ten-year yield fell by four basis points to 4.05%
Raw materials
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West Texas Intermediate crude rose 0.1% to $73.61 a barrel
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Spot gold rose 0.3% to $2,451.40 an ounce
This story was produced with the help of Bloomberg Automation.
–With help from Winnie Hsu, Kana Nishizawa, and John Cheng.
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