Dollar gains, the stock turns south on fears of a Fed-induced recession

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NEW YORK – An earlier rally in global stocks stalled and the dollar strengthened on Friday as investors worried about the Federal Reserve’s policy, raising fears of a recession to control inflation and pushing risk-free sentiment higher.

China had earlier recovered shares in Europe and Asia after cutting a key debt benchmark to bolster its weak economy, helping to drive initial gains on Wall Street.

China has cut its key interest rate for five-year debt, which affects mortgage prices, a decline of 15 basis points that was sharper than expected as authorities seek to mitigate the effects of the economic downturn.

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US Treasury yields fell for the third consecutive session due to concerns over the prospect of growth. The benchmark 10-year note yield fell 5.6 basis points to 2.799%.

Stephen Oth, chief investment officer at FedEx Hermes equities, said equity valuations need to be lower and the expected return on investment, the discount rate, needs to increase.

“The market is beginning to digest the notion that this could be a new world where the discount rate on risky assets is no longer zero,” Auth said.

“You can see that all these different sectors of the market have pounded at the same time and it has become very uncomfortable for investors,” he added.

The pan-European STOXX 600 index closed at an initial 0.73%. MSCI’s stock is down 0.45% in 47 countries, on track for its seventh consecutive weekly fall, its longest losing streak since the index was launched in 1990.

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On Wall Street, the Dow Jones Industrial Average fell 1.09%, the S&P 500 1.28% and the Nasdaq Composite 1.83%.

Fed-funded futures were even stronger, suggesting that the U.S. rate market has retreated slightly from its forecast of some more extreme rate growth. The rate market has set a Fed Funds rate of 2.783% at the end of next year, compared to the current level of 0.83%. Two weeks ago, the rate was as high as 2.9%.

The dollar has recovered some of its recent losses against the euro but has remained in pace for its worst weekly loss against the common currency since the beginning of February as investors questioned whether the greenback had a month-long rally.

The dollar has been supported in recent months by rising security, a hawkish Fed and a flight to safety amid market disasters over fears of a war in Ukraine.

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The dollar index rose 0.136%, the euro fell 0.29% to 0 1.0555. The Japanese yen has strengthened from 0.01% to 127.78 against the dollar.

Eurozone bond yields were higher after a two-day sharp fall as risk aversion improved after China’s rate cut.

Germany’s 10-year government bond yield fell 1.2 basis points to 0.932%, down from last week’s eight-year high of 1.189%.

Markets are pricing at 38 basis points in a July meeting with the European Central Bank. This suggests that the full price increase of 25 basis points has been fixed and the markets are seeing the possibility of moving the additional 25 basis points by about 50/50.

Oil prices remained flat for a week, with the European Union’s planned embargo on Russian oil balancing concerns that economic growth would hurt slowing demand.

US crude was up 0.08% at $ 112.30 a barrel and Brent was at 1 111.64, down 0.36% for the day.

Gold fell 0.1% to 1,840.71 an ounce, where the bullion price is back from a two-week low. But the metal of the safe haven was still likely to post its first weekly profit at five.

Bitcoin fell 4.28% to $ 28,994.71.

(Reporting by Herbert Lash, Samuel Indic in London and Andrew Galbraith in Shanghai; edited by Hugh Lawson, Kirsten Donovan)

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