US stocks plunge after Fed minutes signal further monetary tightening

Stock markets plunged and the sell-off in US government bonds continued on Wednesday afternoon after minutes from the Federal Reserve’s latest meeting warned that the central bank could shift to a “tighter” monetary policy to fight inflation.

Last month, the Fed raised its benchmark interest rate by 0.75 percentage points, the biggest increase in nearly 30 years, in a bid to rein in rising prices. Minutes of the monetary policy committee meeting released Wednesday said Fed officials were concerned that inflation “could take root if the public began to question the committee’s resolve.”

The yield on the benchmark 10-year Treasury note, which rises when prices fall, was 0.11 percentage point higher at 2.92% shortly after the release of the minutes, after climbing around 0, 09 percentage point earlier in the day.

The 10-year yield remained slightly below the yield on the two-year short-term note after falling below Tuesday. Such a pattern – known as an inverted yield curve – is often seen as a harbinger of an impending recession.

The S&P 500 and Nasdaq Composite stock indices, which struggled to find their bearings before the release of the minutes, both fell 0.2%.

Commodity and currency markets also highlighted growing recession fears on Wednesday, with Brent crude – the international benchmark for oil – momentarily falling below $100 a barrel for the first time since April.

Brent was down 2.3% at $100.43 a barrel on Wednesday afternoon. U.S. marker West Texas Intermediate slid 1.1% to $98.45 a barrel, after falling below $100 in the previous session.

The euro also extended its recent losses, falling as much as 1% against the dollar to $1.016 – a move that took the common currency below $1.02 for the first time in two decades.

The dollar index, which measures the U.S. currency against a basket of six others and tends to strengthen during times of uncertainty, added another 0.5% after a strong rally on Tuesday.

“Continued [Federal Reserve] Tightening amid a global slowdown remains a very positive environment for the dollar,” the ING analysts wrote, adding that such an environment could lead the dollar index to “trade around 2% higher, meaning EUR/USD should drift towards parity this month.”

“1.00 is probably the highest psychological level in FX,” ING said, “and fireworks seem likely” when that happens.

Data compiled by Nick Colas, co-founder of DataTrek Research, showed that the dollar’s highs correlated with the exact low days of the S&P 500 in 2009 and 2020.

“The dollar has provided useful information during previous major lows in US large-cap equities,” he said. “The fact that it continues to strengthen against the euro, sterling and other currencies suggests further volatility in US equities.”

The Stoxx 600 stock gauge in Europe rose 1.7% on Wednesday, driven by a sharp rise in shares of Just Eat Takeaway after Amazon agreed to take a 2% stake in the company’s Grubhub arm, and by stronger-than-expected German industry The data.

In Asian stock markets, Hong Kong’s Hang Seng lost 1.2% as fresh outbreaks of Covid-19 heightened recession-related worries.

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