London — Stocks, bond yields and commodities steamed higher on Thursday while the dollar tumbled, as investors suddenly seemed to forget the inflation fears blamed for a brutal market sell-off in recent weeks.

Economists were struggling to explain the turnaround except for the argument that historically it’s not unusual for stocks and bond market borrowing costs to rise in tandem with a rapidly expanding economy.

Some just blamed the weather and time of year. They speculated that strong US inflation data on Wednesday that many had predicted could reignite the rout was probably distorted. They also said the looming Chinese New Year may have caused Asian traders to square up.

Whatever the reason, the animal spirits were back.

Big gains for Wall Street and Asia overnight put MSCI’s 47-country world stocks index back in positive territory for the year and Europe’s main markets followed with 0.6%-1% gains.

"For me it’s a clear indication that inflation is not as big a threat as people made it out to be over the past couple of weeks," said Lukas Daalder, chief investment officer at Robeco in Rotterdam.

"The trend behind the market is still very strongly pointed upwards," he added. "2017 was a very momentum-driven market, and if that’s still the case, which after yesterday it appears to be, then we will probably see new highs before too long." Just as big a puzzle as the rebound in stocks sentiment was the breakdown in correlation between rising US bond yields and dollar.

US treasury yields on benchmark 10-year notes hit a new four-year high of 2.94%.

The dollar tumbled though across the board, including to a 15-month low against the yen of ¥106.18 as worries about the US government’s finances seemed to set again after a White House-led spending splurge and recent corporate tax cuts.

That also marked a drop of 3.8% from its early February peak near ¥110.50, while the euro and pound both climbed back above the $1.25 and $1.40 thresholds.

"The story I hear most frequently from people is it’s the re-emergence of the twin deficits," said RBC Capital Markets head of currency strategy Adam Cole, in London, of the dollar’s persistent weakness.

"There seem to be concern on the US fiscal position and what that implies for the current account."

Volatility drops

Asia’s stocks rally overnight saw Australian shares climb 1.15% and South Korea’s Kospi added 1.1%. Japan’s Nikkei advanced 1.5% following three successive sessions of losses that took it to a four-month low the previous day.

Volatility shrank back rapidly too. The VIX index — Wall Street’s "fear gauge" and a measure of market volatility — fell all the way back to 18, less than half the 50-point peak touched last week.

The dollar’s weakness also lifted emerging markets and commodities though there were idiosyncratic stories in play too.

The rand traded at R11.73 per dollar and near a two-and-a-half-year high of R11.66 set overnight after Jacob Zuma resigned as president.

Brent crude futures shot up over 1% meanwhile to $65.06 per barrel before losing some of its momentum.

While the dollar was a big factor as oil is priced in it, the gains also came after a surge the previous day triggered by supply data and comments for Saudi Arabia’s energy minister that major oil producers would prefer tighter markets than end supply cuts too early.


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