GLOBAL MARKETS-Wall Street mixed as it digests macro 'tsunami'

BY Reuters | TREASURY | 09/26/22 10:30 AM EDT

(Updates to U.S. market open)

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U.S. stocks mixed

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Sterling hits record low before recovering

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Euro hits 20yr low, dollar index soars

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European, Asian shares decline

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Gold, oil choppy

By Lawrence Delevingne and Alun John

BOSTON/LONDON, Sept 26 (Reuters) -

U.S. stocks were mixed, oil prices were choppy, while the dollar and Treasury yields rose on Monday as Wall Street digested a raft of macroeconomic news.

The moves came after sterling slumped to a record low earlier in the day, and a renewed selloff in British gilts pushed euro zone bond yields higher as the reaction to last week's fiscal statement in Britain again roiled markets.

U.S. stocks were mixed -- The Dow Jones Industrial Average dipped about 0.2%, while the S&P 500 and Nasdaq Composite gained 0.10% and 0.8% respectively.

Global equities slid as concerns about high interest rates continued to put pressure on the financial system. Reaction to Italy's election result, where a right-wing alliance won a clear majority, was muted.

Europe's STOXX 600 index slipped for the third straight session, down about 0.43% on the day, a new low since December 2020, and Asian stocks fell about 1.43%.

"I think everyone felt they were swimming in a tsunami of newsflow last week after one of the most incredible macro weeks in recent memory," Deutsche Bank strategist Jim Reid wrote in a client note on Monday.

The pound

skidded to an all-time low against the dollar before recovering on Monday, as investors waited to see if the Bank of England will intervene to calm concerns over government plans that could stretch the country's finances to their limit.

Sterling's declines are partly due to dollar strength - the dollar index, which tracks the greenback against six peers - hit a new 20-year top of 114.58 in early trade. It was last at 113.3, up about 0.2%.

The tumble is leading to speculation the Bank of England will have to hold an emergency meeting to raise rates.

"The Bank of England is in a very difficult spot where if they don't react they risk another sterling collapse and things getting very messy," said Mike Riddell, senior portfolio manager, Allianz Global Investors. "If they do react, a developed market hiking rates to defend the currency looks like an emerging market. So they're damned if they do, damned if they don't,"

The carnage was not confined to currencies. Five-year UK government bond yields jumped 50 basis points to their highest since October 2008, sending euro zone bond yields higher.

Germany's 10-year government bond yield hit its highest since December 2011 at 2.132%, and Italy's benchmark bond yields rose to their highest since 2013.

Those moves were largely in line with the overall picture, rather than an outsized response to Sunday's election in Italy after which Giorgia Meloni looks set to become Italy's first woman prime minister leading its most right-wing government since World War Two.

STRESS BUILDING

The pound's plunge is only the latest unnerving move as investors' skittishness strains global financial markets.

Two-year Treasury yields broke above 4.3% to a new 15-year high. They were last trading at 4.2%.

Oil and gold were under pressure due to the surging greenback. Gold touched a 2-1/2 year low of $1,626.4 before recovering to $1.644.1. Brent crude futures rose nearly 1% to $86.9 a barrel, having earlier fallen to their lowest since January at $84.51 a barrel.

"There has been an economic logic at play, as central banks raised rates to drive monetary policy into restrictive territory, get below trend growth for a while - a polite way of saying a recession - and then you get lower inflation," said Samy Chaar, chief economist at Lombard Odier.

"The question is whether the financial world can go through that sequence. It feels like we are reaching the limit of that, things are starting to break, for example what we see with sterling."

(Reporting by Lawrence Delevingne in Boston, Alun John in London and Tom Westbrook in Sydney. Additional reporting by Harry Robertson in London and Danilo Masoni in Milan; Editing by Toby Chopra)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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