Inflation fears, the expectation of sharp interest rate hikes in the United States and turmoil in the crypto market have caused a black day in the financial markets on Monday. The broad US S&P 500 index fell by up to 3.5 percent during the day, trading 20 percent below its record set on January 4 this year. With that, US stocks officially entered a ‘bear market‘ justly. This has been the case for technology stocks for some time now. The Nasdaq index, which includes many of these stocks, was down 3.8 percent at its all-time low and is already nearly a third below its level at the end of last year.
The Amsterdam AEX index is now 20 percent below its peak in November last year – although it did so briefly three months ago. The pan-European Stoxx index lost 2.4 percent on Monday, but is only 16 percent below its record and is not yet in ‘bear territory’.
Investors had little to flee into: the bond market was also under strong pressure. Ten-year Dutch government bonds fell sharply in price. The effective interest rate, an indicator of mortgage interest rates and the mirror image of a bond’s price, rose to 1.99 percent.
That is a jump of 0.35 percentage point alone since the meeting of the European Central Bank last Thursday in Amsterdam. At the end of 2021, this interest rate was still at -0.2 percent. The rise in Dutch ten-year interest rates over the past three months is the strongest since the early 1980s.
The yield on ten-year Italian government bonds shot up to 4.1 percent after a sharp fall in prices. That is the highest since the end of 2013 in the wake of the euro crisis. The US 10-year yield rose to 3.3 percent, its highest since 2011. This rate has doubled this year alone.
The mood on the stock markets already turned on Friday, when the US inflation for the month of May turned out to be 8.6 percent. Investors had expected inflation to be on its way down. The persistent price increases raised the expectation that the US central bank, the Federal Reserve, will implement faster and larger interest rate hikes in order to suppress inflation, if necessary at the expense of an economic recession. Interest rates have already been raised from between 0 and 0.25 percent in January to between 0.75 percent and 1 percent now.
Investors now expect an additional half a percentage point when the central bank meets on Wednesday, plus at least another 1.5 percentage points after next meetings this year. A quarter of the analysts even expect an interest rate increase of 0.75 percentage point on Wednesday.
The price movements in the crypto market were even more intense than those in the conventional financial markets. Bitcoin lost 21 percent of its value in one day, trading just above $23,000. Ethereum, the most important crypto currency after bitcoin, lost no less than 27 percent. Coins are now back at late 2020 levels, a few months after the latest crypto craze kicked off. The direct reason for the price drop was that Celsius Network, which makes money from lending cryptocurrencies, withdrawing cryptocurrencies invested and all other transactions, froze due to “extreme market conditions”.
Crypto market down p. 2 Crypto billionaires not at ease p. 6
A version of this article also appeared in the newspaper of June 14, 2022