- Stock market selloff accelerates as investors begin to panic about soaring borrowing costs
- Dollar climbs to new highs as yen slumps again, eyes US inflation data
- Oil bounces off lows after China eases Shanghai lockdown, gold attracts some bids
Stocks back in the doldrums
Equity markets remained in the red on Tuesday as global bond yields extended their ascent to multi-year highs, freaking out jittery investors already on edge about the dimming growth outlook following Russia’s invasion of Ukraine. The 10-year Treasury yield in the United States scaled a more than three-year high of 2.8360% overnight while the equivalent German yield jumped to a 6½-year peak of 0.8650% in European trading today.
Increasingly hawkish rhetoric from central bankers, particularly from the Fed, has cemented expectations that monetary tightening will go into high gear in the next few months as inflationary pressures keep simmering, threatening to spark the biggest cost of living crisis in the Western world for generations.
On Wall Street, up until now, the rally in Treasury yields had gone unnoticed as financial conditions remained loose despite the Fed’s taper. But the Ukraine fallout has changed all that as there’s little prospect of high inflation abating anytime soon, tying central banks’ hands.
With optimism for some kind of a ceasefire agreement between Russia and Ukraine fading quickly, the S&P 500 has retraced more than 40% of the March rebound.
But it’s the tech-heavy Nasdaq that’s bore the brunt of the renewed pessimism as stocks with bloated valuations are less appealing when long-term borrowing costs are on the up. The Nasdaq Composite slid 2.2% on Monday and European markets and Wall Street futures were extending their losses today. Asian indices were mostly down too with the exception of Chinese and Hong Kong ones, which were boosted by video game stocks after authorities approved the first gaming licenses in nine months in a possible sign of easing regulatory crackdown.
Dollar marches higher, yen takes another beating but aussie perks up
In the currency markets, the US dollar reigned supreme once again as rival yields have been unable to keep up with the surge in Treasury yields. The Japanese yen has been the biggest casualty of the bond market rout as local yields have been capped at 0.25% by the Bank of Japan. However, the BoJ’s prized yield curve control policy is under growing scrutiny amid the rapid depreciation of the yen and a record rise in Japanese wholesale prices.
Policymakers have been sending mixed signals on the yen’s exchange rate lately, with the government worried about FX instability even as the BoJ has doubled down on maintaining its yield target. The yen plunged to a fresh almost seven-year trough of 125.77 per dollar on Monday and is on the verge of brushing new lows today.
This has lifted the dollar index above the 100 level for the first time in two years and there could be further gains in store for the US currency from today’s CPI report (12:30 GMT). US inflation is expected to have spiked to 8.4% in March, with the month-on-month pace projected to hit a staggering 1.2%.
The euro is back under pressure, giving up its modest post-French election gains, while the Canadian dollar has been unable to halt a week-long slide despite oil prices firming today.
However, the Australian and New Zealand dollars have managed to turn positive, likely buoyed by domestic business surveys that pointed to rising cost pressures. The RBNZ is set to raise interest rates on Wednesday (02:00 GMT) but analysts are split as to whether it will hike by 25 or 50 basis points. The kiwi is at risk of resuming its downfall versus the greenback if the RBNZ decides to play it safe again. On the other hand, some traders are speculating that the RBA may surprise with a rate hike in May rather than in June after the upbeat NAB business confidence readings for March.
Oil attempts to bounce back, gold slightly off highs
In commodities, Brent crude futures were attempting to establish a steadier footing by reclaiming the $100/barrel level following the gradual retreat from the March peaks. Having been hit by demand worries from the recent lockdowns in China, there was some good news today after authorities in Shanghai relaxed mobility restrictions for nearly half the city’s population.
WTI futures were last trading up 2.8% at $96.93 a barrel.
Gold meanwhile was edging slightly lower, easing from yesterday’s four-week top of $1968.91/oz when it came close to breaking above its month-long sideways range. The precious metal is likely benefiting from the latest outflow of funds from equity markets. If it wasn’t for the surge in bond yields, the boost in gold prices would probably be a lot bigger but higher yields look set to curb bullion’s advances for some time.