US markets experience their largest two-month slump, falling more than 2%

As a result of the grim economic picture and worries that Federal Reserve officials may adopt a hawkish tone at a symposium this week, US markets had their largest slump in two months on Monday.

The benchmark S&P 500 index on Wall Street fell 2.1%, marking the worst single-day decline since mid-June. Every industry saw drops, but tech equities and cyclical consumer companies like Amazon and Tesla took the biggest hit. The tech-heavy Nasdaq Composite index dropped 2.5%.

Because rising interest rates lower the relative value of earnings far in the future, tech firms that forecast long-term growth are thought to be particularly vulnerable to rate increases.

Julian Howard, lead investment director at GAM, asserted that "the Nasdaq is the epicentre of interest rate uncertainty in the stock market. [The Fed] is talking up hawkishness, which is making the market quite nervous. The job isn’t done [on inflation]."

In an effort to lower inflation from 40-year highs, the Fed has already increased interest rates three times this year; yet, policymakers have emphasized that there is still more work to be done.

Investors have cautioned that the previous gains were not proof of a rise in investor optimism after a terrible start to the year, despite the fact that Monday's stock market falls seemed to contrast with a strong rally in the third quarter.

"I’m not buying into this relief rally," said   Jamie Niven, a senior fund manager at Candriam. " I think we’re in for more downside for risk markets for the rest of the year."

At the annual meeting of the Federal Reserve, which is taking place this week in Jackson Hole, Wyoming, Fed Chair Jay Powell is anticipated to reiterate his commitment to swiftly raising interest rates.

Powell "[will] justify why they are raising rates so fast and why they have to," predicted Joost van Leenders, senior investment strategist at Van Lanschot Kempen.

Andrew Hollenhorst, an economist with Citigroup, stated: "We continue to expect a relatively hawkish speech."

The government bond markets responded to the hawkish forecasts by increasing the yield on the policy-sensitive 2-year Treasury note by 0.06 percentage points to 3.32 percent. The yield on 2-year bonds increased from less than 1% at the end of last year to roughly 2.5% as recently as late May. The benchmark 10-year note's yield surpassed 3% for the first time in a month.

Traders reported seeing a frenzy of put option trading on Treasury futures on Monday, bets that the value of the futures would decline. Higher yields represent lower prices.

The bearish bets, many of which expire on Friday, were placed, according to John Brady, managing director at futures brokerage RJ O'Brien, to protect against a potential additional sell-off in the Treasury market after the Jackson Hole meeting.

The euro fell against the dollar by 0.9% on foreign exchange markets, falling below $1 for the second time this summer. In July, it achieved parity with the dollar for the first time in twenty years.

Gas and electricity prices in Europe increased on Monday as a result of concerns over potential reductions in the Russian energy supply, adding to worries that the continent would enter a recession.

With Germany's Dax down 2.3%, the regional Stoxx Europe 600 equities gauge ended the day 1% lower.

The dollar index, which compares the US dollar to a basket of peers and typically increases during uncertain times, increased by 0.7%. The index is back near to the two-decade peak it set in July after rising by almost 3% this month.

On Tuesday morning, Asian stocks broadly followed Wall Street lower, with Australia's S&P/ASX 200 down 0.5% and Japan's Topix down 1.1%. The Hang Seng in Hong Kong was flat.

In an effort to support its heavily indebted real estate sector, the People's Bank of China reduced its mortgage lending rate for the second time this year on Monday.

By fLEXI tEAM