NEW YORK :World stocks plummeted again on Thursday and government bonds hovered near multi-year highs after a series of rate rises from global central banks rekindled fears that aggressive policy tightening could drag economies into recession.
Following a relief rally on Wednesday when investors welcomed the U.S. Federal Reserve's aggressive move to raise rates by 75 basis points - its biggest rate hike since 1994 - by buying shares, two other spates of policy tightening in Britain and Switzerland seemed to have sobered investors into focusing on the chance that economies could slow as rates rise.
"Can the economy take it? So far, leading indicators show good readings, but we remain wary of a consumer strike," said Giuseppe Sette, president of the quantitative research firm Toggle.
MSCI's gauge of stocks across the globe slumped 2.25 per cent to hover near a 19-1/2-month low.
In New York, the Dow Jones Industrial Average dropped 2.5 per cent, the S&P 500 shed 3.3 per cent and the Nasdaq Composite slumped 4.1 per cent. All three indices were trading at their lowest in at least 1-1/2-years.
The dollar, which has benefited from rising U.S. yields, flagged on Thursday, weighed in part by the Swiss franc, which surged after the Swiss National Bank surprised investors earlier in the day by raising interest rates for the first time in 15 years by 50 basis points.
The Bank of England (BoE) also lifted rates on Thursday for a fifth time since December by 25 basis points, a day after the European Central Bank promised support to temper a bond market rout fueled by hawkish expectations.
By early evening in New York, the Swiss franc was up a whopping 2.9 per cent in its biggest one-day gain in seven years. A surging Swiss franc dragged the dollar index down 0.95 per cent to 103.80, pulling it from a 20-year high of 105.79 struck on Wednesday.
"There's a lot of nervousness. After the initial relief to the Fed ... markets seem to have woken up that it is still a 75 basis point rate hike," said Giuseppe Sersale, strategist and portfolio manager at Anthilia in Milan.
"If even the Swiss central bank surprisingly raises by half a point, clearly investors imagine that the tightening of central banks is still very violent. There is very little to be cheerful about," Sersale added.
Underscoring the gloom in markets, MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.84 per cent, and the pan-European STOXX 600 index dropped 2.47 per cent. Swiss stocks were close to confirming a bear market pattern, having fallen about 19 per cent since a Jan. 3 closing high.
Britain's top FTSE 100 equity benchmark slumped 3.14 per cent following the BoE's rate hike, which confounded some forecasts of a bigger move.
"Once again the BoE looks like the timid cat next to the Fed's roar against inflation. ... A 6-3 vote on 25 bps means that the sterling bulls will have little to back up any attempt to push the pound higher against the dollar," said Chris Beauchamp, chief market analyst at IG Group in London.
Sterling initially plunged after the BoE's rate announcement, but recovered in New York trade to be up 1.4 per cent at $1.23485.
The Fed's rate rise on Wednesday was accompanied by projections that showed U.S. economic growth slowing to a below-trend rate of 1.7 per cent, and policymakers expect to cut interest rates in 2024.
Data on Friday showed a sharper-than-expected rise in U.S. inflation in May, alongside a University of Michigan survey showing consumers' five-year inflation expectations jumping sharply to their highest since June 2008.
The SNB hike helped put fresh pressure on European bond prices as investors ramped up bets for ECB rate hikes. Germany's 10-year yield, the benchmark for the bloc, jumped as much as 26 basis points at one point.
U.S. 10-year Treasury yields hit a high of 3.495 per cent before pulling back to 3.3125 per cent., but still within sight of an 11-year high of 3.498 per cent struck on Tuesday.
Oil prices reversed earlier losses after the United States announced new sanctions on Iran, and as supply concerns remain at the forefront of energy markets.
U.S. crude jumped 1.45 per cent to $116.98 per barrel and Brent rose 0.57 per cent to $119.19.
Gold, which has been hammered by a stronger dollar and rising yields, rose as the dollar and Treasury yields flagged. Spot gold jumped 1.2 per cent to $1,854.54 an ounce.