Stocks tumble on inflation fears, Treasury yields jump

By Herbert Lash

NEW YORK (Reuters) - U.S. Treasury yields jumped and global equity markets tanked on Thursday, erasing the prior day's rally on Wall Street, as investors worried aggressive central bank policies around the world to tamp down inflation could easily shackle growth.

The rout on Wall Street snuffed a rally in European stocks. Fears of a recession, as the Bank of England suggested after it hiked rates earlier in London, quashed enthusiasm from Federal Reserve Chair Jerome Powell's remarks on Wednesday when he said policymakers were not considering 75 basis-point moves in the future.

The yield on 10-year Treasury notes rose 12.2 basis points to 3.037%, with inflation-hedge gold rising after Powell emphasized risks to the economy from soaring inflation.

Data shows the long end of the Treasury market has suffered the most deeply negative returns this year going back to at least 1928, said Joseph LaVorgna, chief economist for the Americas at Natixis in New York.

"I'm surprised by the price action in the Treasury market because this has been an extraordinary historic move," he said. "This is a pretty big move on top of an already significant move. It's due to rising real yields," LaVorgna said.

Markets will remain volatile until there is a clear picture of Fed rate policy and its trajectory later this year, said Anthony Saglimbene, global market strategist at Ameriprise Financial (NYSE:AMP).

Investors are "worried that when we get to the back half of this year, the Fed is going to be so aggressive with raising interest rates that they're going to take the economy into a recession," he said, adding "there's an overall negative sentiment in the market."

Worries about fast-paced rate increases at a time of China's COVID-19 lockdowns and the war in Ukraine to slow surging inflation have heavily weighed on stock markets this year.

The pan-European STOXX 600 index fell 0.70% after opening 1.84% higher. MSCI's gauge of global stock performance shed 2.55% as it tumbled to lows last seen in March 2021. The global benchmark is down 14% year to date.

On Wall Street, the Dow Jones Industrial Average fell 3.12% and the S&P 500 lost 3.56%. The Nasdaq Composite shed 4.99% in its biggest single-day plunge since June 2020, and closed at its lowest level since November 2020. The technology-rich index is down 21.3% year to date.

Britain's pound and government bond yields fell sharply after the BoE raised rates to their highest level since 2009 to counter inflation heading above 10% and warned the UK economy was at risk of recession.

Sterling was last at $1.2364, down 2.04% on the day, while the euro fell 0.7% to $1.0547 after dire German industrial orders data on Thursday.

German industrial orders fell more than expected in March,driven mainly by declining orders from abroad as the war inUkraine hit manufacturing demand in Europe's biggest economy.

"The German economy is programmed for a downturn," said Thomas Gitzel, chief economist at VP Bank.

"The war in Ukraine, the supply chain problems and high rates of inflation are spoiling companies' appetite for investment," he said, adding that a recession was becoming increasingly likely.

The dollar index rose 0.946% after falling sharply on Wednesday following the Fed's rate hike. It is up more than 7% so far this year. [/FRX]

Bitcoin fell 8.61% to $36,266.98.

Graphic: World stocks lose $10 trillion in 2022 - https://fingfx.thomsonreuters.com/gfx/mkt/lbpgnyyekvq/Pasted%20image%201651741024316.png

China's battered shares recovered some ground, gaining 0.7% as mainland markets resumed trade after a three-day holiday.

Investors also cheered a pledge by China's central bank for more monetary policy support to help businesses badly hit by the latest COVID-19 outbreak.

U.S. gold futures settled up 0.4% at $1,875.70 an ounce, after paring gains of more than 2%.

Oil prices rose as a stronger dollar offset supply concerns after the European Union's plans for new sanctions against Russia, including an embargo on crude in six months. Traders noted OPEC+ again rebuffed consumer calls for a faster pace of output rises.

U.S. crude futures rose 45 cents to settle at $108.26 a barrel and Brent settled up 76 cents at $110.90 a barrel.

Graphic: Rate hikes push up global bond market borrowing costs - https://fingfx.thomsonreuters.com/gfx/mkt/akpezyybrvr/Pasted%20image%201651748522040.png