Stock markets hit by bond whiplash
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[February 26, 2021] By
Tom Arnold
LONDON (Reuters) - Global stocks fell on
Friday, with emerging market and Asia shares hardest hit, as a recent
rout in global bond markets 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 3.1% lower, while European shares were deep in
the red, with the STOXX 600 down 1.1%.
The MSCI world equity index, which tracks shares in 50 countries, was
1.1% lower and heading for its worst week in a month.
U.S. futures pointed to a marginally positive open for Wall Street, with
S&P 500 e-minis up 0.1% and futures for the tech-heavy Nasdaq up 0.2%.
Asia earlier 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 was 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 surprisingly good, and that means down the road we should get back
to growth."
Friday's carnage was triggered by a whiplash in bonds as rising
inflation expectations triggered a selloff of safe-haven debt.
The scale of the recent sell-off prompted Australia's central bank to
launch a surprise bond buying operation to try to staunch the bleeding.
European Central Bank executive board member Isabel Schnabel reiterated
on Friday that changes in nominal interest rates had to be monitored
closely.
Germany's benchmark yield was on course for its biggest monthly jump in
three years.
Still, there were signs of respite. On Friday, 10-year German government
bond yields were down 4 basis points at -0.248%. French and Austrian
bonds were back in negative territory after both turning positive on
Thursday for the first time since June.
Yields on the 10-year Treasury note eased back to 1.4633% 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.
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"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.
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."
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.
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 and Turkish lira, which slid for a fifth straight day, erasing all
the year's gains.
The flows helped nudge the U.S. dollar up more broadly, with the dollar index
rising to 90.568. It also gained on the low-yielding yen, briefly reaching the
highest since September at 106.42. The euro slid 0.6%.
With riskier assets under pressure, bitcoin fell 5% to $44,713, set for its
worst week since March.
The jump in yields has tarnished gold, which offers no fixed return, and dragged
it down 0.5% to $1,763.00 per ounce, headed for its second straight monthly
decline.
Oil prices dropped on a higher dollar and expectations of more supply.[O/R]
U.S. crude fell 2% to $62.26 per barrel and Brent lost 1.4% to $65.89.
(Additional reporting by Wayne Cole and Swati Pandey in Sydney; editing by Sam
Holmes, William Maclean, Larry King)
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