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Stock markets roiled by global bond whiplash

Published 02/25/2021, 09:04 PM
Updated 02/26/2021, 04:45 AM
© Reuters. Pedestrians are reflected in an electronic board displaying various stock prices at a brokerage in Tokyo

© Reuters. Pedestrians are reflected in an electronic board displaying various stock prices at a brokerage in Tokyo

By Tom Arnold and Wayne Cole

LONDON (Reuters) - Global stocks fell on Friday, with Asian shares down by the most in nine months, as a rout in global bond markets sent yields flying and spooked investors amid fears the heavy losses suffered could trigger distressed selling in other assets.

MSCI's Emerging Markets equity index suffered its biggest daily drop in nearly 10 months and was 2.7% lower, while European shares opened in the red, with the STOXX 600 down 0.7%, recovering from heavier losses earlier in the session.

The MSCI world equity index, which tracks shares in 50 countries, was 0.9% lower and heading for its worst week in a month.

Asia saw the heaviest selling, with MSCI's broadest index of Asia-Pacific shares outside Japan sliding more than 3% to a one-month low, its steepest one-day percentage loss since May 2020.

For the week the index is down more than 5%, its worst weekly showing since March last year when the coronavirus pandemic had sparked fears of a global recession.

"It is not the beginning of a correction in equities, more a logical consolidation as price to earnings ratios were excessive," said Francois Savary, chief investment officer at Swiss wealth manager Prime Partners.

"What is reassuring is that Q4 2020 earnings were good and earnings per share suprisingly good and that means down the road we should get back to growth."

Friday's carnage was triggered by a whiplash in bonds.

The scale of the sell-off prompted Australia's central bank to launch a surprise bond buying operation to try and staunch the bleeding.

The European Central Bank is monitoring the recent surge in government bond borrowing costs but will not try to control the yield curve, ECB chief economist Philip Lane told a Spanish newspaper.

On Friday 10-year German government bond yields were down nearly 4 basis points at -0.267% and French and Austrian bonds were back in negative territory.

Yields on the 10-year Treasury note eased back to 1.4530% from a one-year high of 1.614% on Thursday.

"Bond yields could still go higher in the short term though as bond selling begets more bond selling," said Shane Oliver, head of investment strategy at AMP (OTC:AMLTF).

"The longer this continues the greater the risk of a more severe correction in share markets if earnings upgrades struggle to keep up with the rise in bond yields."

Markets were hedging the risk of an earlier rate hike from the Federal Reserve, even though officials this week vowed any move was long in the future.

Fed fund futures are now almost fully priced for a rise to 0.25% by January 2023, while Eurodollars have it discounted for June 2022.

Even the thought of an eventual end to super-cheap money sent shivers through global stock markets, which have been regularly hitting record highs and stretching valuations.

"The fixed income rout is shifting into a more lethal phase for risky assets," says Damien McColough, Westpac's head of rates strategy.

"The rise in yields has long been mostly seen as a story of improving growth expectations, if anything padding risky assets, but the overnight move notably included a steep lift in real rates and a bringing forward of Fed lift-off expectations."

Japan's Nikkei shed 4%, its biggest single-day fall since April, and Chinese blue chips joined the retreat with a drop of 2.4%.

EMERGING STRAINS

Overnight, the Dow fell 1.75%, while the S&P 500 lost 2.45% and the Nasdaq 3.52%, the biggest decline in almost four months for the tech-heavy index.

Tech darlings all suffered, with Apple Inc (NASDAQ:AAPL), Tesla (NASDAQ:TSLA) Inc, Amazon.com Inc (NASDAQ:AMZN), NVIDIA Corp (NASDAQ:NVDA) and Microsoft Corp (NASDAQ:MSFT) the biggest drags.

All of that elevated the importance of U.S. personal consumption data due later on Friday, which includes one of the Fed's favoured inflation measures.

Core inflation is actually expected to dip to 1.4% in January, which could help calm market angst, but any upside surprise would likely accelerate the bond rout.

The surge in Treasury yields caused ructions in emerging markets, which feared the better returns on offer in the United States might attract funds away.

Currencies favoured for leveraged carry trades all suffered, including the Brazil real, Turkish lira and South African rand.

The flows helped nudge the U.S. dollar up more broadly, with the dollar index rising to 90.390. It also gained on the low-yielding yen, briefly reaching the highest since September at 106.42. The euro eased a touch to $1.2144.

The jump in yields has tarnished gold, which offers no fixed return, and dragged it down 0.1% to $1,767.81 per ounce, having earlier fallen to its lowest since June 26.

Oil prices dropped on a higher dollar and expectations of more supply.[O/R]

© Reuters. The German share price index DAX graph is pictured at the stock exchange in Frankfurt

U.S. crude fell 1.5% to $62.57 per barrel and Brent also lost 1.3% to $66.02.

Latest comments

Markets dont like new administration.
everyone's knows there is only one bond........James Bond
Not falling for it. Interest, QE, where you going to go, crypto? Ha
The economy still isn’t even close to bottoming out. Long way to drop
Im sad
So, in other words: Markets are selling of because the economy is going to do well soon. That's how it's supposed to be!
the economy has a vastly long way to go to a) catch up with stock market valuations and b) to any form of normality compared to proper growth and activity with millions unemployed and furloughed and many small and medium businesses bust or about to bust - kept alive on cheap debt. But a growing economy where money supply far outweighs productivity and with commodity input costs massively increasing, including oil, means high inflation - which then forces the FED to increase interest rates on debt - which then will destroy half the companies in the US stock market and beyond that are zombies - only surviving because of stupidly cheap money. The whole thing is a ponzi scheme.
is it a hedge fund double act? Taking profit and short sell at the same times! This is not a normal taking profit pattern!
You can make any reason but everything is in under wear ups, under control....
financial times
Hot money in the world are taking profit now. The dollar will get strong when return to US. Fed will shrink the balance sheet earlier than expected because the economy is better than expected!
Institutions left a lot of bag holders as they took profit today but hey, you know gme and amc
Wow if the time to buy is when other are fearful based on the comment u guys are terrified so time to buy?
that quote is supposed to be relevant when a market has already crashed and valuations are cheap - not when they are at nose bleeding highs. Context is everything.
This is still considered a dip to buy from what everyone is saying.  Nobody has 'thrown in the towel' on the market. It will take months of chop and of not being able to breach a level with 4x 3% down days for an event like you are talking about to happen.
Money is leaving tech and rotating into growth stocks. Inflation is deadly to the NASDAQ.   I get a chuckle when I think of any sucker who bought TSLA back in January.    HINT:   get out now; do not buy the dip in tech stock; riding the slope of hope is hopeless.
With Apple, Tesla, Microsoft & Amazon all down, Senator Elizabeth Warren can drop her 1% tax on the billionaires - they lost more than that today.
The elastic band is about to snap.
Never has there been more of a casino market than now and even Gold is stumbling under the influence. What safe haven is there any more ? Mars rocks ?
Even your name tells the story lol
They have made gold and silver’s price tied to a paper market. It wasn’t enough to give the bankers the power to make our currency fiat we gave them executive control over pricing of real money.
bitcoin and Cardano - they may drop 40% in a quick shock, but within three months, they'll be higher than they are now. A proper escape from a broken financial system - and at small cap prices, they have so much higher to go as people eventually wake up to their use cases and value and potential.
Australia saving the world
The Fed will fix it. ).
you smoke or what ?
They won’t fo bankrupt they will just turn the dollar into monopoly money while they short gold and siver on the crimex.
 there is indeed a vast amount of debt that needs to be renewed this year and I just can't see any buyers apart from the FED - which is what happened to Japan, where the central bank and government own half the bond and stock market. it's a very serious situation.
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