Markets stumble on interest rate fears, US government warns money is running out
The party will be over soon. On Tuesday, investors recognized the fact that the days of record low interest rates are drawing to a close.
It was just part of a busy day in global markets. The selling of US stocks accelerated. Consumer confidence hit an unexpected wall. Oh, and then the US Treasury Secretary said the world’s most powerful economy was about to run out of liquidity.
surrender to the world
The government bond yields were the biggest reason for the markets faltering yesterday. When they rise, it indicates that the markets are expecting a rise in interest rates, which makes borrowing more expensive. The yield on the 10-year US Treasury rose 0.05% to 1.539%, the highest level since June.
The Fed already said last week that half of its board expects interest rates to rise in 2022, and on Monday, the Bank of England said increases in the UK are also likely. Both central banks have hinted that they are about to start ending major stimulus programs as well.
The potential double whammy of high borrowing costs and lack of incentives is making investors sweat:
- The S&P 500 fell 2% on Tuesday, the biggest one-day drop since May. The technology-focused Nasdaq fell 2.8 percent.
- The European Stoxx 600 Index is down 1.9% – while technology shares in the index are down 4.4%.
scary word: Also down was the news on Tuesday that the US Consumer Confidence Index fell to a seven-month low of 109.3, indicating that people are wary of spending. This has heightened fears of “stagflation” – a frightening economic scenario in which inflation is high (it is already) and growth slows.
hooked on the ceiling: And if all that wasn’t enough, Treasury Secretary Janet Yellen warned Tuesday that the government will run out of money on October 18 if Congress does not raise the federal debt limit. Historically, this has been a bipartisan affair (it’s been done 100 times since World War II), but so far Republicans are playing hardball. But don’t worry, Yellen said only that a US default would lead to “a large-scale economic catastrophe”.