By Geoffrey Smith
Investing.com -- Fear of a 75 basis point interest rate hike by the Fed sends bond yields higher and stocks lower. Stagflation fears hit Europe, as the U.K. economy shrinks in April and fears of Eurozone bond market stress increase. Bitcoin falls to an 18-month low after a big crypto lender suspends withdrawals amid a liquidity crisis. And Shanghai and Beijing both struggle to keep free of Covid-19, hitting world oil prices. Here’s what you need to know in financial markets on Monday, 13th June.
1. Fed fear spooks markets, sends yields soaring
U.S. investors thought long and hard about Friday’s inflation report over the weekend, and appear to have come to the conclusion that it’s best to take money off the table before the Federal Reserve’s meeting on Tuesday and Wednesday.
The overshoot in inflation in May, which featured big rises in prices for food and energy but also for rents and – again - airfares and cars, has led to fresh speculation that the Fed may raise its target range for fed funds by 75 basis points, rather than the 50 basis points that has been the consensus view since the Fed’s last meeting.
By 7:10 AM ET (1110 GMT), benchmark yields for U.S. Treasuries were higher along the yield curve, with two-year yields up 16 basis points, 5-year yields up 14 basis points and 10-year yields up 10 basis points, all at new highs for the year.
Dow futures were down 547 points, or 1.7%, while S&P 500 futures were down 2.2% and Nasdaq 100 futures were down 2.9%. Stocks likely to be in focus later include Smith & Wesson (NASDAQ:SWBI), after U.S. Senators agreed on the outlines of a deal on stricter background checks for buyers of some firearms at the weekend, albeit not the handguns that are S&W’s specialty.
2. Celsius Network
Cryptocurrencies sold off sharply and broadly after Celsius Network, one of the world’s biggest crypto lending operations, abruptly halted customer withdrawals at the weekend. It didn’t give any estimate of how long the “pause” in operations would last.
Bitcoin fell over 12% to trade at its lowest since December 2020, while Ethereum, Solana, Cardano and Dogecoin all also fell by between 11% and 19%.
The episode comes only a couple of weeks after the collapse of the Terra-Luna network which, like Celsius, had grown rapidly on the promise of high token-based rewards despite the concerns of regulators about its business model. It’s also a reflection of the pressure on all cryptocurrencies from the rising trend in interest rates worldwide, which is making it more expensive to use traditional fiat currencies to finance investments in crypto.
3. Shanghai
Authorities ordered mass Covid-19 testing for all residents in 15 of its 16 districts at the weekend, while five districts barred residents from leaving home, casting fresh doubt over the key economic hub’s ability to return to normal after its first big outbreak in two years earlier this spring.
The Chinese capital Beijing has also suffered a setback with its reopening plans, reporting an “explosive” outbreak of cases linked to one particular bar.
Hong Kong also reported its highest number of Covid cases in two months over the weekend but the authorities have not announced any major new restrictions.
Mainland Chinese stock indices, which had rallied hard last week on signs of an improvement of relations between the government and the technology sector, fell by as much as 2.1%, while the Hang Seng index fell 3.4%. The USD/CNH rose 0.3% to 6.7551
4 U.K. GDP falls again; Eurozone bond spreads widen
The U.K. economy shrunk for the second month in a row, as April’s sharp rise in energy prices, along with some – arguably less threatening – short-term factors weighed on everything from manufacturing output to services and construction.
The pound weakened against the dollar, on perceptions that the data will make it harder for the Bank of England to raise interest rates to contain inflation, which – as in the U.S. and elsewhere – is running at multi-decade highs. The BoE meets on Thursday, a day after the Fed’s decision.
Fears for the economy weren’t restricted to the U.K. Eurozone bond spreads also widened as investors priced in the likelihood of a sharper slowdown in the single currency area. While spreads – a key barometer of Eurozone breakup risk – are nowhere near the levels they hit a decade ago, analysts have started to worry that in absolute, nominal terms, long-term interest rates are already at levels that may be unsustainable for highly-indebted, low-growth economies such as Italy and Greece.
5 Oil down as growth fears predominate
Crude oil prices fell to their lowest in nearly a week, under pressure from the U.S. inflation news and the news out of China, which cast doubt on the outlook for demand from the world’s biggest importer. That overshadowed ongoing problems in Libya, where the ongoing civil war has taken over 1 million barrels a day of oil offline in the last couple of weeks.
By 7:15 AM ET, U.S. crude futures were down 1.5% at $118.81 a barrel, while Brent crude was down 1.4% at $120.30 a barrel.
Over the weekend, U.S. gasoline prices had on average topped $5 a gallon nationwide for the first time ever. That’s despite the fact that crude is still more than $20 a barrel below its 2008 peak.