European shares and US stock futures kicked off the new month on a downbeat note, struggling to reverse course after Wall Street posted its longest streak of quarterly losses since the 2008 financial crisis.
The regional Stoxx Europe 600 gauge lost 1.3 per cent in early dealings on Monday, while contracts tracking the S&P 500 dipped 0.1 per cent ahead of the New York open. In Asian markets, Hong Kong’s Hang Seng fell 0.9 per cent.
Those moves came after the S&P closed 1.5 per cent lower on Friday, capping a third straight quarter of declines with a loss of 5.3 per cent as equity markets buckled under the tension of central banks, led by the US Federal Reserve, turning the screws on monetary policy.
“A rapid tightening in US monetary conditions — rising borrowing rates and the dollar — has been conducive to building financial stress in the past and is now becoming a key vulnerability,” said Bruce Kasman, chief economist at JPMorgan Chase, adding that “recent weeks have shown a substantial rise in overall volatility and increased credit market stress”.
European bank shares, seen as particularly exposed to the health of the economy, dropped on Monday with a Stoxx sub-index sliding 1 per cent in morning trade. Credit Suisse was down 9 per cent after the Swiss bank moved over the weekend to reassure investors over its financial strength. Shares in French bank Société Générale slipped more than 1 per cent.
The final week of the third quarter was also characterised by significant volatility in UK assets, which rippled into other global financial markets, after the Bank of England intervened to calm turmoil in the trading of the country’s government debt.
The yield on the 10-year UK gilt slid 0.09 percentage points to 4 per cent at the start of dealings on Monday, after it emerged that the government would scrap a plan to abolish a reduction in tax on the UK’s higher earners.
Gilts had convulsed in the trading sessions following chancellor Kwasi Kwarteng’s “mini” budget on September 23, entailing £45bn in unfunded tax cuts which are expected to be covered in large part by government bond issuance. The BoE on Wednesday stepped in with a new programme to buy long-dated debt, after the 30-year gilt yield surged by historic magnitudes under extreme selling pressure. Bond yields rise as their prices fall.
The yield on the benchmark US Treasury note also slipped 0.02 percentage points on Monday to 3.78 per cent, after a week of selling exacerbated by the moves in UK markets.
Equities and government debt markets have, unusually, fallen in tandem this year as the Fed leads the charge on raising interest rates aggressively to tame persistently high inflation. Concerns have intensified in recent months that the US central bank and its peers will jack up borrowing costs so high that it would compound a global recession.
Those fears have also driven swings in the price of oil, which is dictated to an extent by expectations of demand. Anticipation of an economic slowdown has pushed Brent crude below $90 a barrel, after the international marker surged earlier this year on worries about supply triggered by Russia’s full-scale invasion of Ukraine.
On Monday, Brent added 3.2 per cent to $87.83 a barrel, helped by news that the oil producers’ cartel Opec+ would plan a substantial production cut.
In currencies, the pound was up 0.1 per cent at $1.117 following the news of the UK government’s change of direction on the higher tax rate. Last Monday, sterling slumped to its lowest level on record against the dollar at $1.035.