US stocks and government bonds are on course for their worst month of the year as investors respond to the Federal Reserves message that interest rates are set to stay higher for longer than previously thought.
Wall Streets benchmark S and P 500 stock index has fallen more than 5 per cent in September dragging it towards its first quarterly loss in 12 months, the (Financial Times) said.
The S and P is still up 11 per cent this year, but has been propped up by a small number of heavily weighted tech stocks that surged earlier in the year fuelled by enthusiasm about artificial intelligence.
A retreat in the US bond market also accelerated last week after the Fed signalled it would cut rates much more slowly next year and in 2025 than investors had been pricing in, the paper added.
The yield on 10-year Treasuries, which rises when prices fall, on Wednesday hit its highest level since 2007 and is on track for the biggest monthly jump in a year.
At the beginning of the month, traders in the futures market
were betting that interest rates would be about 4.2 per cent by the end of 2024. Now they are betting on rates of 4.8 per cent by that time.
Corporate debt markets have also been affected, as investors worry that highly indebted companies may struggle to refinance their borrowings in the face of higher rates, Financial Times said.
“The market has been consistently wrong about Fed policy this year,” Financial Times quoted Kevin Gordon, senior investment strategist at Charles Schwab, as saying.
The shift in the US has come as the Fed reacts to strong economic data and a still hot labour market, which contrast with the eurozone and the UK, where fears of a downturn which would reduce pressure to keep interest rates high to control inflation are greater, according to Financial Times.
“Its like the market is finally getting on board with the view that were not on the brink of a recession,” said Sonal Desai, chief investment officer at Franklin Templeton Fixed Income.
Fed officials last week lowered their fore
casts for unemployment and increased their growth predictions.
Soaring oil prices compounded market worries about persistent inflation and tight monetary policy.
Some investors predict that higher rates could eventually push the economy towards recession despite the recent strong data.
“One of our concerns is that the lagged effect of Fed tightening will catch up with the economy as we move into 2024,” said Jeff Schulze, head of economic and market strategy at ClearBridge Investments. “The longer rates are up there, the higher the chance.”
Source: Qatar News Agency