Stock markets jolted by bond whiplash

Friday, February 26, 2021

Emerging markets and Asia shares were the hardest hit when global stock markets fell Friday.

A recent rout in global bond markets 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 3.1 percent lower, while European shares were deep in the red, with the STOXX 600 down by 1.1 percent.

The sell-off has intensified in London. The FTSE 100 share index has shed 1.71 percent at 6,538.10, down by113.86 points.

The MSCI world equity index, which tracks shares in 50 countries, was 1.1% lower and heading for its worst week in a month.

Asia earlier saw the heaviest selling, with MSCI's broadest index of Asia-Pacific shares outside Japan sliding by more than 3 percent to a one-month low, its steepest one-day percentage loss since May 2020.

For the week, the index was down by more than 5 percent, its worst weekly showing since March last year 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 Francois Savary, chief investment officer at Swiss wealth manager Prime Partners.

"What is reassuring is that Q4 2020 earnings were good and earnings per share surprisingly good, and that means down the road we should get back to growth."

Friday's carnage was triggered by a whiplash in bonds as rising inflation expectations triggered a selloff of safe-haven debt.

The scale of the recent sell-off prompted Australia's central bank to launch a surprise bond buying operation to try to staunch the bleeding.

European Central Bank executive board member Isabel Schnabel reiterated on Friday that changes in nominal interest rates had to be monitored closely.

Germany's benchmark yield was on course for its biggest monthly jump in three years.

Still, there were signs of respite. On Friday, 10-year German government bond yields were down by 4 basis points at -0.248 percent. French and Austrian

bonds were back in negative territory after both turning positive on Thursday for the first time since June.

Yields on the 10-year Treasury note eased back to 1.4633 percent from a one-year high of 1.614 percent 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 increase from the Federal Reserve, even though officials this week vowed any move was long in the future.

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."