Global stocks fall further even as bonds find support
Fears that a return of inflation will spell a quick end to a decade of easy money policies helped spark a global sell-off in equities on Monday with European and Asian markets picking up where Wall Street left off on Friday.
Asian markets tumbled while Europe’s Stoxx 600 benchmark index fell 1 per cent with financial, technology and resource stocks leading the selling as futures trading pointed to further falls at the start of US session.
The S&P 500 suffered its worst trading day in two years on Friday after strong US jobs data underpinned forecasts of higher inflation as the global economy strengthens. Asian markets followed suit with Hong Kong’s Hang Seng index down by as much as 2.7 per cent, before paring its losses to close down 1.1 per cent overall. In Japan, the Topix index slid 2.2 per cent, closing just shy of its session low.
London’s FTSE 100 fell 1.4 per cent, while the Frankfurt’s Xetra Dax 30 lost 1 per cent. According to the futures market, the S&P 500 will fall a further 0.7 per cent at the start of Wall Street trading.
The sell-off persisted even as bond markets found a measure of support, helping the US 10-year yield drift back to 2.85 per cent, leaving it unchanged from Friday’s close. It had been up nearly 4 basis points to a high of 2.8831 per cent earlier on Monday. It started the year at 2.43 per cent.
Jan Hatzius, chief economist at Goldman Sachs, wrote in a research note published at the weekend: “The expectation of tighter policy is now, at last, starting to weigh on broader financial conditions.
“We are not particularly concerned about the move so far . . . Nevertheless, it might indicate that the equity and credit markets will need some time to digest the recent repricing before taking the next step.”
Bond markets have come under rising pressure this year as economic sentiment has improved and central banks started to unwind some of their post-crisis monetary stimulus. A surge in US wages revealed in data on Friday and robust economic growth raise the possibility that the Federal Reserve could look to tighten monetary policy this year more aggressively than anticipated.
Treasuries have also been hit by expectations that the US deficit will rise because of the recent tax cuts, leading to more government borrowing. In turn, this has hit stock markets as rising bond yields can undercut equities by lifting borrowing costs for companies and making returns from stocks look relatively less attractive.
Mohammed Apabhai, Citigroup’s head of Asia-Pacific trading strategy, noted there is also “uncertainty over what the new Fed governor is going to do”.
However, JPMorgan Asset Management chief global strategist David Kelly disagreed with the “popular narrative” that equities have been “tanking” because of fears interest rates would rise due to higher inflation.
“The somewhat untidy but nevertheless more plausible explanation is that both the bond market and stock market were overdue for a correction after a remarkably placid two years,” Mr Kelly said.
The week ahead could be “bumpy”, he added, “but as the markets move and commentary becomes extreme, investors would do well to maintain some scepticism about what they read on the web and focus more on the basics of fundamentals, valuation and positioning.”
In Asia, the sell-off was also fuelled by the view that equity markets’ stellar start to the year could soon run out of steam. Investors poured a record amount of money into Asia and emerging market funds at the end of January, reaching an all-time high in the last week of the month at $7.9bn.
Analysts at Morgan Stanley said in a recent research note that they expect a “meaningful” near-term correction in the Hang Seng index, noting that the index is “at its most technically overbought since April 2015”.
However, some analysts reckon the sell-off is temporary and the outlook for Asian stocks remains positive.
“The sell-off in this morning’s Asia markets is a natural part of a market cycle where we are seeing inflationary pressures following good corporate earnings, so this is not the time for investors to panic,” said Felix Lam, an Asian equity fund manager at BNP Paribas Asset Management.
Additional reporting by Edward White