Picture: 123RF/OLEG DUDKO
Picture: 123RF/OLEG DUDKO

London — 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 excluding 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 2020 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 François Savary, chief investment officer at Swiss wealth manager Prime Partners. “What is reassuring is that fourth-quarter 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 to staunch the bleeding. The European Central Bank (ECB) 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 four basis points at -0.267%, and French and Austrian bonds were back in negative territory. Yields on the 10-year US 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. “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 US Federal Reserve, even though, this week, officials 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, Tesla, Amazon, Nvidia and Microsoft the biggest drags.

All of that elevated the importance of US personal consumption data due later on Friday, which includes one of the US Fed’s favoured inflation measures. Core inflation is actually expected to have dipped to 1.4% in January, which could help calm market angst, but any upside surprise would likely accelerate the bond rout.

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

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

The flows helped nudge the 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/oz, having earlier fallen to its lowest since June 26.

Oil prices dropped on a higher dollar and expectations of more supply. US crude fell 1.5% to $62.57 per barrel and Brent lost 1.3% to $66.02.


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