US Treasury rally powers on, world stock markets take a knock

U.S. treasuries led a broad-based bond rally on Thursday as concerns over the strength of the economic recovery picked up and inflation fears ebbed, with stocks lower across the globe.

The fresh burst in pessimism continued a pattern set earlier in the week and comes as central bankers juggle concerns about the pace of economic recovery from the COVID-19 pandemic and its impact on inflation.

“The (bond market) bears have given up and thrown in the towel,” said Chris Scicluna, head of economic research at Daiwa Capital Markets in London as benchmark 10-year yields slid to 1.25%, their lowest since February.

That followed a signal from the U.S. Federal Reserve on Wednesday that it had no immediate plans to tighten monetary policy.

The rally in bond prices, extending moves seen earlier in the week, had led to a “serious debate” about their cause, said Deutsche Bank analyst Jim Reid.

Some consider the move a sign the market is re-pricing the potential for the economy to be hit by secular stagnation after the pandemic, while others point to technical drivers including reduced supply from the Fed and higher demand to buy, he added.

Mark Haefele, Chief Investment Officer, UBS Global Wealth Management, said despite the dip in U.S. yields, the Swiss adviser to many of the world’s super-rich expected the benchmark to bounce back.

“With the expectation of a taper announcement from the Fed over the next few months, robust economic growth driving continued strength of nonfarm payrolls, and further (post-pandemic economic) reopening, we expect the 10-year yield to reach 2% by the end of the year.”

Elsewhere on central bank watch, the European Central Bank on Thursday announced the results of a strategy review in which it said it would set a new inflation target of 2%, compared with its previous target of “below but close to 2%”.

German 10-year yields were down 3 basis points.

STOCKS

With risk off sentiment gripping markets, equities were a sea of red, with U.S. markets opening down around 1.3%, tracking weakness in Europe and Asia.

The MSCI’s leading index of global stocks was down 0.5%, extending early session losses and tracking a 1.6% decline in the equivalent index of Asia shares outside Japan to its lowest level since mid-May.

That had been fuelled by China’s move to rein in its tech giants, with the most recent being U.S.-listed Didi, which was ordered to pull its app from stores.

Despite its drop, the global index remains in a broad trading range established since late June and just off its record high. The STOXX Europe 600, a broad gauge of Europe’s biggest companies, meanwhile, was down 1.9%.

“We believe valuations to be frothy not just in India but in different geographies across the world,” Nikhil Kamath, Co-Founder and CIO at asset manager True Beacon, said. “We are hedged as much as 55% today, our net exposure to the market is only about 45%.”

THREAT TO RECOVERY

In tandem with the tech crackdown, guidance toward rate cuts from Chinese policymakers has also spooked some investors by highlighting softness in China’s economy – weak loan growth and slow demand – which threatens the pace of the global recovery.

The Chinese cabinet said on Wednesday that policymakers will use timely cuts in the bank reserve requirement ratio (RRR) to support the real economy, especially small firms.

The yield on 10-year Chinese sovereign debt posted its sharpest fall in nearly a year on Thursday, dropping to 2.998%, the lowest since August.

In currency markets, the dollar edged lower against a basket of major peers, down 0.3%. Cryptocurrencies were sold on negative comments from Chinese policymakers and bitcoin fell to a more than one-week low.

Oil was under pressure, as a wave of new viral infections sweeps Asia and the world that could curb demand, while traders anticipate a possible rise in supply after the collapse of talks among producers. [O/R]

Brent futures were last down 0.4% at $73.12 a barrel while U.S. crude fell 0.6%.

(Additional reporting by Tom Westbrook, Yoruk Bahceli and Brenna Hughes-Neghaiwi; editing by Kirsten Donovan, Angus MacSwan, Barbara Lewis, William Maclean)

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