European equities are down Friday after U.S. Treasury yields surged to a 14-year high as an imminent interest rate hike by the Fed fueled recession concerns.
European stocks are down Friday morning after the U.S. Treasury yields jumped to a 14-year high as investors brace for another major interest rate hike, fueling recession fears. Growing political turmoil in the UK following Liz Truss’s resignation also weighed on Europe’s stock futures.
Investors Show Fear as Fed Reiterates Plans to Keep Hiking Rates Aggressively
Stocks in Europe opened in red Friday morning as soaring bond yields in the US and a looming aggressive interest rate hike added to recession concerns. Germany’s are down over 1.6%, while in France and UK’s contract slipped 1.72% and 0.79%, respectively.
The U.S. Treasury yields hit a 14-year high on Friday, standing at 4.276% at the time of writing. Similarly, the yield sits at the highest level since 2007, at 4.603%.
Another jump in Treasury yields comes as investors get ready for a fourth consecutive 75 basis points (bps) interest rate hike in November, which is likely to tip the world’s biggest economy into a recession.
The Federal Reserve has been maintaining its hawkish monetary policy over recent months to bring down the 4-decade high inflation. The latest (CPI) print showed that inflation stood at 8.2% in September year-over-year, higher than analysts’ estimates of 8.1%.
While Fed’s aggressive rate hikes have somewhat lowered inflation levels, they remain a far cry from the Fed’s target of 2%. Philadelphia Federal Reserve President Patrick Harker said Thursday the central bank will keep hiking interest rates and expects them to be above 4% by the end of 2022.
“We are going to keep raising rates for a while. Given our frankly disappointing lack of progress on curtailing inflation, I expect we will be well above 4% by the end of the year.”
– Patrick Harker, President of Philadelphia Federal Reserve
Turmoil in the UK and Europe Gains Traction
The drop in stock index futures came also in part due to the exacerbating political tumult in the UK, following Prime Minister Liz Truss’s resignation yesterday. Truss served only 44 days in the office, making her the shortest-serving PM in history.
However, market strategists say the U.S. 10-year yields remain the key market drivers, downplaying the impact of Truss’s resignation. Merion Capital Group’s Richard Farr said everything that’s happening “in stocks is a derivative of what’s happening in 10-year yields, and Truss is just a distraction.”