Global equities experienced a sell-off on Tuesday as investors prepared for an extended period of high interest rates. This caused the dollar to surge to a 10-month high, while Treasuries saw a decline. The decline in stocks comes as traders expect the Federal Reserve to maintain higher interest rates for a longer duration. The Fed’s recent release of interest rate estimates, known as the “dot plot,” revealed a slower rate cut trajectory in 2024. As a result, government bond yields in the US and Europe rose, indicating that borrowing costs would remain elevated for a longer period than anticipated. European equities also suffered losses, with Germany’s Dax reaching its lowest level since March. The dollar’s rise against peer currencies further supported expectations of tighter monetary policy.
The shift in expectations regarding interest rates has led to a decrease in bets on rate cuts and an increase in expected rates by the end of 2024. Initially, traders predicted US interest rates to be at 4.2% by the end of 2024, implying the possibility of five rate cuts. However, this has now changed, with traders expecting rates to be at 4.7%, indicating three or four cuts. As a consequence, Jack Ablin, Chief Investment Officer at Cresset Capital, explained that cuts are being priced out, resulting in less significant drops in rates compared to previous projections. The impact of this market shift was not limited to the US, as European equities also experienced losses. The Stoxx Europe 600 fell by 0.6%, while Germany’s Dax declined 1%. The 10-year German Bunds, a regional benchmark in Europe, also reached their highest level since 2011, reflecting the heightened borrowing costs in the region.
This shift in the market also influenced the rise of the dollar against peer currencies. The dollar tends to increase when investors expect tighter monetary policy. While investors have been more aggressive in pricing in rate cuts and strong economic growth, Mark Haefele, Chief Investment Officer at UBS Global Wealth Management, believes that the market expectations need adjustment. Haefele emphasizes that an end to rate hikes and the prospect of weaker growth alongside higher rates support a preference for fixed income. Investors are now waiting for the release of eurozone preliminary inflation data, projected to show a decrease in consumer prices from 5.2% in August to 4.5% in September. Christine Lagarde, President of the European Central Bank, highlighted the intention to maintain high rates in the eurozone until inflation reaches the target of 2%. The ECB recently raised its benchmark deposit rate to 4%, which is likely to be the last tightening measure in the current cycle.