U.S. and European stocks tumbled on Friday, the dollar scaled a 22-year high, and bonds sold off again as fears grew that a central bank prescription of raising interest rates to tame inflation will drag major economies into recession. The Dow narrowly missed confirming a bear market as a deepening downturn in business activity across the eurozone left Wall Street wallowing in a sea of red.
The British currency and debt prices weakened further after the UK government announced huge debt-financed tax cuts. The euro plummeted to a 20-year low and sterling to a 37-year low. World stock markets followed suit, with the pan-European STOXX 600 index closing down 2.34%, its biggest weekly loss in three months. The Dow Jones was the first major U.S. stock index to fall below its June trough on an intraday basis. The S&P 500 and Nasdaq were already in bear territory, but the Fed’s projection of high U.S. rates sparked a rout in equity and bond markets. The euro fell for a fourth straight day, sliding 1.49% to $0.9689 after data showed the downturn in the German economy worsened.
UK bond prices went into a tailspin, with yields on the five-year gilt leaping 51.4 basis points to 4.052%, the largest one-day rise since 1991. 10-year Treasury Inflation-Protected Securities (TIPS) reached 1.426%, the highest since February 2011. The inversion in the yield curve between two- and 10-year notes reached minus 58 basis points on Thursday, the most inverted in at least two decades. Gold prices fell to their lowest since April 2020 as the rally in the dollar and rising Treasury yields hurt bullion, which pays no interest.