US stocks turned lower on Tuesday and government bonds came under pressure, as investors awaited a closely watched interest rate decision by the Federal Reserve.
Wall Street’s S&P 500 gauge lost 0.8 per cent, while the technology-heavy Nasdaq Composite slid 0.7 per cent. In Europe, the regional Stoxx 600 gauge dropped 0.8 per cent, while London’s FTSE 100 slipped 0.5 per cent as traders returned to their desks following a UK public holiday to mark the state funeral of Queen Elizabeth.
Central bankers are poised this week to discuss how far they can jack up borrowing costs to curb rapid price growth, while facing the prospect of a prolonged global economic downturn.
In a reflection of the challenges weighing on corporate America, shares in Ford slipped almost 7 per cent in early dealings on Tuesday after the carmaker said on Monday that inflation-related supplier costs during the third quarter would run about $1bn higher than originally expected.
That announcement came days after a profit warning from FedEx, seen as a bellwether of global economic growth, led the group’s shares to their biggest daily drop on record.
Yields on US government debt ticked upwards on Tuesday, after reaching their highest levels in more than a decade on Monday ahead of the start of the Fed’s two-day meeting at which rate-setters are widely expected to deliver a third consecutive jumbo 0.75 percentage point rate increase.
The yield on the 10-year US Treasury note added almost 0.1 percentage point to 3.59 per cent, having pushed above the 3.5 per cent threshold in the previous session for the first time since April 2011. The yield on the policy-sensitive two-year bond remained at a 15-year high of 3.98 per cent. Bond yields rise as their prices fall.
Selling pressure was more pronounced in eurozone debt markets, with the yield on the 10-year German Bund up 0.15 percentage points to 1.94 per cent. The UK’s 10-year gilt yield also added 0.15 percentage points to 3.3 per cent, while the two-year gilt yield rose 0.22 percentage points to 3.34 per cent.
In the UK, markets are pricing in the likelihood of the Bank of England raising interest rates by 0.75 percentage points this week, following a 0.5 percentage point increase in August, the sharpest rise in 27 years. Swifter action on rates by other central banks has intensified the pressure on the BoE to step up the pace of monetary tightening to combat inflation and support the pound.
Sweden’s central bank raised its policy interest rate by a full percentage point to 1.75 per cent on Tuesday, a bigger move than expected by analysts and the largest increase since the early 1990s. The Riksbank said pushing up interest rates would reduce the risk that high inflation would persist over the longer term. Inflation is running at 9 per cent in Sweden, a 30-year high, and the central bank has forecast that the economy will shrink by 0.7 per cent in 2023.
Sterling slipped 0.4 per cent to $1.139 after sinking on Friday to its lowest level against the dollar since 1985. The pound has lost almost 16 per cent so far this year with business confidence sliding as the UK economy hovers on the brink of a recession that could last until the end of 2023, according to the BoE’s forecast.
Central banks in Japan, Norway, Brazil, South Africa, Philippines, Indonesia, Taiwan, Turkey and Switzerland are also due to announce their latest decisions on interest rates this week, leading to additional financial tightening globally.