The Dow Jones Industrial Average fell on Monday as the S&P 500 headed for a new closing low for the year amid surging interest rates and foreign currency turmoil.
The Dow dropped 326 points, or 1.1%. The S&P 500 declined 1%, and the Nasdaq Composite slipped 0.4%.
The British pound dropped to a record low on Monday against the U.S. dollar, falling 4% at one point to an all-time low of $1.0382. The pound has since come off its worst levels on speculation that the Bank of England may have to raise rates more aggressively to tamp down inflation.
The Federal Reserve’s aggressive hiking campaign, coupled with U.K.’s tax cuts announced last week has caused the U.S. dollar to surge. The euro hit the lowest versus the dollar since 2002. A surging greenback can hurt the profits of U.S. multinationals and also wreak havoc on global trade, with so much of it transacted in dollars.
“Such U.S. dollar strength has historically led to some kind of financial/economic crisis,” wrote Morgan Stanley’s Michael Wilson, chief U.S. equity strategist, in a note. “If there was ever a time to be on the lookout for something to break, this would be it.”
The S&P 500 is on track for a new 2022 closing low as it dipped below the June closing low of 3,666.77 during Monday afternoon trading. It closed Friday at 3,693.23 after trading briefly below that level. The benchmark’s intraday low for the year is 3,636.87.
On Friday, stocks ended a brutal week with the blue-chip Dow finding a new intraday low for the year and closing lower by 486 points. The broad-market S&P 500 temporarily broke below its June closing low and ended down 1.7%. The tech-heavy Nasdaq Composite lost 1.8%.
Another super-sized rate hike by the Federal Reserve last week was the catalyst for the latest leg downward in markets. The central bank indicated it could raise rates as high as 4.6% before pulling back. The forecast also shows the Fed plans to be aggressive this year, hiking rates to 4.4% before 2022 ends.
Bond yields soared after the Fed enacted another rate hike of 75 basis points. The 2-year and 10-year Treasury rates hit highs not seen in over a decade. On Friday, Goldman Sachs slashed its year-end target for the S&P 500 to 3,600 from 4,300.
Rates were surging again on Monday with the 2-year Treasury topping 4.29% at one point in the day.