A sell-off on global stock and bond markets entered its second straight session as investors scrambled to adjust to increased expectations of tightening of ultra-loose monetary policy.
Recent remarks by the heads of the European Central Bank, the Federal Reserve, the Bank of England and the Bank of Canada have raised expectations that the period of historically low interest rates and unprecedented central bank bond buying will soon recede.
That has triggered a rush by some investors to reduce their exposure to government debt, pushing yields higher. Equities have also sold off on the potential impact of policy changes with losses on Wall Street on Thursday leading to fresh weakness in Asian and European equities on Friday.
“We now have near unanimous views among developed market central banks that it is time to move towards a normalisation of monetary policy,” said Paul Flood, manager of the Newton Multi Asset Income Fund.
“Investors reliant on the negative correlation between bonds and equities will be feeling the pain the most, highlighting the risks of a policy that has focused on asset price inflation. For now, cash is king.”
At the start of full trade in Europe, 10-year bonds are rising further across Europe, albeit at a more gradual pace, with Germany’s benchmark yield up 1 basis point at 0.455 per cent. Italy’s rose 2 basis points to 2.158 per cent, and the UK’s was just over 2 basis points higher to 1.26 per cent. Yields rise when prices fall.
The 10-year bond yields of Germany, France and the UK have all risen at least 20bp over the past week.
Stocks are falling further, compounding falls over the previous session that took international European indices back to levels last seen in April. The Euro Stoxx 600 fell 0.2 per cent in opening trade. London’s FTSE 100 slipped a further 0.3 per cent and the Xetra Dax 30 fell 0.2 per cent in Frankfurt.
On currencies markets, the pound is holding above $1.30, up 0.1 per cent at $1.3010. It last consistently held that level nine months ago. The euro slipped 0.1 per cent to $1.1432, trimming its gain for the week to 2 per cent. The dollar index is down 0.1 per at 95.602, down 1.7 per cent since Monday.
Jim Caron, a bond fund manager at Morgan Stanley Investment Management, said the moves from central banks this week “almost felt co-ordinated”, adding: “Markets are paying attention to what the central bankers are saying.”
Japan’s 10-year bond yield edged up 2bp to 0.07 per cent but reaction was subdued since the prospect of tightening monetary policy elsewhere would leave the Bank of Japan the global flag bearer for ultra-loose monetary policy.
Some analysts were sounding more sanguine as the end of the trading week approached. Koon Chow, strategist at UBP, said: “ I am inclined to downplay this sell-off as the eurozone has plenty of reasons to expect a very gradual tapering of stimulus. We have a lot more economic ‘baggage’ that will probably keep inflation depressed for a very long time and even when Draghi does taper, I guess we will wait a long time before the ECB shifts into hiking rates.”