Soaring inflation expectations see global stocks fall for third day
Bond yields surge with 10-year Treasury touching highest level since June 17 as spectre of rate increases grows
London — Global shares fell for a third successive day on Tuesday, while bond yields and measures of inflation expectations on both sides of the Atlantic soared on anxiety about the prospect of central banks raising interest rates.
The MSCI’s All Country World Index, which tracks shares across 49 countries, was down 0.36% on the day after the start of trading in Europe.
The 10-year US Treasury yield hit 1.5444%, its highest level since June 17, pulling up eurozone bond yields in its wake. Two-year Treasury yields surged to 18-month highs.
A market measure of eurozone inflation expectations jumped to 1.8308%, its highest level since 2015. The yield on the 10-year US Treasury Inflation-Protected Securities (TIPS) rose to -0.82%, its highest since late June. “The sell-off on bond markets is related to markets reading recent statements from the Fed and the Bank of England as being more hawkish with a view to the timing of rate hikes,” said Sarah Hewin, senior economist at Standard Chartered Bank.
“[US Federal Reserve chair Jerome] Powell’s comments [on Monday] seem to indicate more nervousness on inflation and those have had an impact on Treasury yields. That uncertainty on how transitory the so-called transitory factors are on top of the energy price rises seem to be accentuating nerves about inflation becoming embedded.”
Fed policymakers last week indicated they are ready to raise rates in 2022 and that the bank is likely to begin reducing its monthly bond purchases as soon as November.
Powell and Treasury Secretary Janet Yellen will testify at a congress hearing at 2pm GMT. Close attention will also be on European Central Bank policymakers speaking at the ECB’s central bank forum, starting with ECB President Christine Lagarde noon GMT.
Surging yields pressured high-growth technology shares at the start of trading in Europe, while fresh signs of a slowdown in China’s economy also weighed on investor sentiment, pushing the pan-European Stoxx 600 index down more than 1%.
London’s FTSE 100 index fell 0.6%, while Germany’s DAX dropped more than 1%. France’s CAC 40 slumped 1.6% and Italy’s FTSE MIB index fell 1.2%.
E-mini futures for the S&P 500 fell 0.9%, indicating Wall Street would open lower later on Tuesday.
Rising bond yields also boosted the dollar, with the index that measures its strength rising to a five-week high. The Japanese yen fell against the dollar and the euro as rising yields made the currencies more attractive to Japanese buyers.
Earlier in Asia, shares were mixed as the fallout of Chinese property developer Evergrande’s debt crisis and a widening power shortage in China weighed on sentiment.
Australia’s benchmark S&P/ASX200 index closed 1.47% lower, led by a sell-off in healthcare and technology stocks, while Japan’s Nikkei was down 0.2% after halving its initial losses.
China’s blue chip index CSI300 edged up 0.1%, as Hong Kong’s Hang Seng index gained 1.34%, snapping a recent run of negative sessions.
During Asian trade, Brent crude oil hit $80 a barrel for the first time in three years, driven by regional economies beginning to reopen from the Covid-19 pandemic and supply concerns.
Positives for property
Hong Kong and mainland China’s major property indices rose by 3% to 8% after the People’s Bank of China (PBOC) pledged to support homeowners.
“There has been positive news for the property sector, and markets are digesting that after all of the negative news flow of the past few days,” said Tammy Leung, a strategist at Everbright Sun Hung Kai.
Still, investors remain on edge over the future of Evergrande, which failed to meet a deadline to make an interest payment to offshore bond holders.
Evergrande has 30 days to make the payment before it falls into default and Shenzhen authorities are now investigating the company’s wealth management unit.
Gold prices fell to a 1½-month low on Tuesday, with spot gold hitting its lowest level since August 11 at $1,735.40 per ounce.
London nickel and tin prices extended losses into a second session on Tuesday, as widening power cuts in top metals consumer China cause worries about downstream demand.
Analysts said the blackouts could affect China’s listed industrial stocks.
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