Global equities stall after Canada’s surprise hike

Borrowing costs in government bond markets rose and share markets stalled on Thursday after a surprise interest rate hike in Canada gave investors their second reminder of the week that the surge in global interest rates isn’t done yet.

Asian markets had struggled overnight and the cautious mood continued in Europe as London’s FTSE, Germany’s DAX and the France’s CAC40 gradually crawled higher after starting in the red.

Traders were being driven by a broad repricing in the bond markets over when and where interest rates in the world’s biggest economies are likely to peak.

In an almost carbon copy of a surprise rate rise in Australia this week, Canada caught markets off guard on Wednesday by hiking its interest rates to a 22-year high of 4.75% due to an overheating economy and stubbornly high inflation.

US 10-year Treasury yields, the benchmark for global borrowing costs, was back above 3.8% again, while in Europe Germany’s two-year yields briefly topped 3% for the first time since March.

“The main theme to everything out there is the bond sell-off and the realisation that the pause [in the rate hiking cycles of central banks] doesn’t mean the end,” said Societe Generale strategist Kit Jukes.

“We are definitely repricing rate expectations higher,” he added, explaining that traders were also now questioning the long-held view that the US Federal Reserve would end its rate hike cycle well before the European Central Bank.

The Fed, the European Central Bank and the Bank of Japan all have interest rate decisions next week.

Tapas Strickland, head of market economics at NAB, said the steps from Bank of Canada and Reserve Bank of Australia meant US inflation data on Tuesday next week will be pivotal for whether the Fed hikes this month or skips a move as widely expected.

The dollar fell slightly on Thursday but remained near to a three-month high after a more than 2.5% rise against the world’s other top currencies over the last month.

Markets are now pricing in a 64% chance of the Fed standing pat next week, compared with 78% just a day earlier, according to the CME FedWatch Tool. Traders are largely expecting a 25 basis-point hike in July though.

“The view here was that if both Australia and Canada felt the need for further hikes, in all probability the Fed would too,” said Chris Turner, head of markets at ING.

Trying times

Chinese shares and Hong Kong’s Hang Seng index had both dipped again overnight, still feeling the effects of Wednesday’s slump in exports data — a 7.5% year-on-year drop and the biggest decline since January.

“The weak export numbers will have observers looking for a new round of policy stimulus,” Saxo Markets strategists said.

The yen strengthened 0.2% to 139.80/$ after revised data there showed Japan’s economy grew more than initially thought in January-March.

The dollar index, which measures the US currency against six major peers, was down 0.1% in European trading. The euro was 0.15% firmer at $1.0717 while the Canadian dollar was consolidating the gains made after the Bank of Canada’s surprise hike.

Gold prices steadied after a 1% drop in the previous session, with the spot price up 0.3% at $1,945.89 an ounce.

In emerging markets, Turkey’s lira slumped to another record low. Signs that President Recep Tayyip Erdogan's newly re-elected government is abandoning an 18-month strategy of keeping the currency on a tight leash saw the lira nosedive 7% on Wednesday.

“The thing is that it [the lira] has been held artificially stable for so long in the lead up to the elections,” said Erik Meyersson, SEB’s chief emerging markets strategist, adding that questions about Turkey’s economic policies remained.

Reuters