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 European equities stabilized after the previous session's heavy
losses as upbeat regional economic and corporate reports helped. But
bond yields continued to push higher, with investors reassessing the
early year deflation scare in the light of a 50 percent rebound in
oil prices from January's trough.
That deflation scare, itself driven by a halving of energy prices at
the back end of 2014, had unleashed a wave of central bank interest
rate cuts and bond buying by the European Central Bank, sank many
bond yields to zero and below and lifted relatively higher yielding
equities to ever higher records.
With oil now bouncing back sharply and after last week's news that
Europe ending four months of consumer price deflation last month,
there has been some reversal of those trades.
Oil prices jumped another 2 percent on Wednesday to their highest
this year.
Germany's 10-year yield hit a 2015 high just under 0.6 percent. The
yield has more than tripled in a week and risen 10-fold in just
three weeks, erasing all the gains made this year.
Benchmark 10-year yields on Spanish, Italian and UK government bonds
also hit year highs before retreating back below Tuesday's closing
levels. The 10-year U.S. Treasury yield was within three basis
points of a 2015 peak too.
"The six million dollar question is (whether) this is a new trend or
a positioning washout which will run its course in the next few
hours?" said Deutsche Bank economist Robert Burgess.
"When you get big crowded positioning and everything becomes
consensus, it doesn't take much to trigger an unwind."
Spain's benchmark yield hit 1.96 percent, Italy's 1.98 percent and
Britain's gilt yield broke through 2 percent, although the selling
abated throughout the morning.
Europe's index of leading 300 stocks was up 0.1 percent on the day
at 1,557 points, having earlier touched a two-month low of 1,545. In
choppy trading, Germany's DAX was up 0.7 percent, having also hit a
two-month low earlier in the session.
The euro zone's blue chip benchmark EuroStoxx50 regained almost 1
percent of the 2.4 percent losses it recorded on Tuesday.
Corporate earnings results and surprisingly strong data showing
Spain's services sector growing at its fastest pace since 2000
helped cushion European stocks. [.EU]
U.S. futures pointed to a slightly higher open on Wall Street. The
S&P 500 lost 1.18 percent on Tuesday, and the Nasdaq 1.55 percent.
REFLATION
Bonds have been among the best performing asset classes in recent
years thanks to low inflation and the unconventional policy easing
by the world's central banks. But signs are emerging that investors
are tired of chasing ever-shrinking yields.
And some traders said there was concern that losses incurred on
bond-heavy portfolios may see investors cash in on some of their
best performing trades of the year to date.
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One of the most crowded trades in equities is also showing signs of
crumbling. In the six months to the end of April, Chinese stocks
doubled in value. On Wednesday they fell 1.6 percent, following the
previous day's 4-percent slump.
A major index of Asian shares is down 3 percent from a more than
seven-year high on April 29. MSCI's broadest index of Asia-Pacific
shares outside Japan fell 1 percent on Wednesday, and Australian
stocks ended down 2.3 percent.
"If the rise in yield resulting from dumping Bunds is compounded
into other G10 government bonds by possible signs of oil-driven
reflation currents, then stocks will have to take notice," City
Index chief markets strategist Ashraf Laidi said.
A broad bounce in commodities saw oil and copper prices rise to
their highest levels so far this year.
Brent crude was up 2.2 percent on the day at $68.99 a barrel, with
U.S. crude up 2.4 percent at $61.88.
In currencies, the dollar remained under pressure after data on
Tuesday showed that the U.S. trade deficit widened sharply in April,
suggesting the economy probably shrank in the first quarter.
The euro was the main winner, its allure brightened by the steep
rise in euro zone bond yields. The common currency was up 0.5
percent at $1.1240.
The dollar index was down a third of one percent at 94.813,
retreating from a one-week high of 95.946.
Later in the day, Federal Reserve Chair Janet Yellen is scheduled to
speak and markets will be super sensitive to any guidance on the
outlook for the first hike in interest rates.
European markets shrugged off news that Greece met 200 million euro
interest payment to International Monetary Fund due on Wednesday.
Athens is quickly running out of money and is trying to persuade
euro zone partners and the IMF to extend further aid. A bigger test
will be a 750-million-euro payment due on May 12.
(Additional reporting by Saikat Chatterjee in Hong Kong; Editing by
Toby Chopra)
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