Global stocks brush aside broadening bonds sell-off

London — World stocks climbed to five-week highs on Wednesday as investors ignored a broadening sell-off in global bond markets that’s been fuelled by a combination of soaring inflation and hawkish comments from US policymakers.

Even though two-year US Treasury yields are up 73 basis points so far in March and set for their biggest monthly jump since 2004, investors have been relatively sanguine about the implications of higher yields on stock market valuations.

MSCI’s broadest gauge of world stocks rose 0.2% to the highest since February 17, a week before Russia invaded Ukraine. Its Asian gauge rose 1% to the highest since early March.

European stocks also rose, with a pan-European equity benchmark hitting a one-month high in early London trading. US stock futures signalled small gains.

“It’s almost as if the negative impacts of inflation, rising interest rates and the uncertainties of war are no longer of concern,” said Stuart Cole, head macro-economist at Equiti Capital, who added that investors were focusing on stocks that could withstand the high inflationary environment.

Technology shares which have had an inverse correlation with higher interest rates in the past were the biggest drivers of broader market gains, with a Hong Kong gauge of technology stocks rising to a three-week high.

Battered e-commerce giant Alibaba, which recently expanded a buyback programme, rose 6% and in Tokyo out-of-favour tech investment firm SoftBank Group rose 7%. The main US tech index ended up 2% overnight cutting its year-to-date losses to 10% from 20% at mid-March.

“Stocks sold off too much and you see a bit of a rally,” said Jun Bei Liu, a portfolio manager at Tribeca Investment Partners in Sydney, but she added it had the flavour of short covering by hedge funds rather than new money piling in.

Bond sell-off

The bulk the action was focused in the bond markets, with two-year US yields pausing for breath at a six-year high after a big rise this month.

The sharp rise in short-dated yields flattened the gap between two and 10-year US yields to its lowest levels since the coronavirus pandemic hit global markets in March 2020. An inverted yield curve is widely seen as a predictor of a recession.

The sell-off in short-dated yields prompted Fed fund futures to price in an aggressive 190 bps of rate hikes for the rest of 2022 after a 25 bps rate hike last week. Futures were nearly pricing in the probability of a 50 bps hike in May.

The sell-off in US markets reverberated elsewhere, with German and British bond yields climbing; soaring UK inflation readings were also a factor as data showed inflation rose to a 30-year high of 6.2% last month.

Currency market activity continued to be relatively subdued with major pairs trading in tight ranges, confirming the lack of any clear directional trends with the Japanese yen the only notable outlier.

The Japanese unit is now trading below 121 to the dollar after Bank of Japan Governor Haruhiko Kuroda said it was premature to debate the exit from ultra-loose monetary policy.

Commodity markets have been kept on edge by anticipated supply disruptions as a result of the war in Ukraine and were firm against a lack of tangible progress towards peace.

Oil steadied at lofty heights, with Brent crude futures up 1% at $116.67 a barrel and WTI up 1% at $110.34.

Grain prices remained supported by supply concerns, especially for delivery later in the year.

“Those gains are a sign that the market is setting itself to be without much Black Sea supply well into season 2022,” said Tobin Gorey, an agriculture commodity strategist at Commonwealth Bank of Australia in Sydney.

Reuters