LONDON (Reuters) – Global stocks fell Friday, with Asian stocks falling the most in nine months, after a flight in global bond markets sent yields soaring and scared investors over fears the heavy losses could lead to a distressed sale of other assets.
MSCI’s Emerging Markets stock index suffered the largest daily decline in nearly 10 months, falling 2.7%, while European stocks opened in the red, with the STOXX 600 down 0.7%, recovering from heavier losses earlier in the session.
The MSCI world stock index, which tracks stocks in 50 countries, was 0.9% lower and is heading for the worst week in a month.
Asia had the largest sales, with MSCI’s widest index of Asia-Pacific stocks outside Japan declining more than 3% to its one-month low, the highest one-day percentage loss since May 2020.
For this week, the index is down more than 5%, its worst weekly view since March last year, when the coronavirus pandemic raised fears of a global recession.
“It is not the start of a correction in stocks, but more of a logical consolidation, as the price / earnings ratios have been excessively high,” said Francois Savary, chief investment officer at Swiss asset manager Prime Partners.
“What is reassuring is that earnings in the fourth quarter of 2020 were good and earnings per share surprisingly good, and that means we have to get back on track to growth.”
Friday’s carnage was triggered by a bond whiplash.
The magnitude of the sell-off prompted the Australian central bank to launch a surprise bond purchase operation to stop the bleeding.
The European Central Bank is monitoring the recent rise in government bond financing costs, but will not try to control the yield curve, ECB chief economist Philip Lane told a Spanish newspaper.
On Friday, 10-year German government bond yields fell nearly 4 basis points to -0.267% and French and Austrian bonds were back in negative territory.
Yields on the 10-year Treasury bill fell back to 1.4530% on Thursday, from its one-year high at 1.614%.
“Bond yields could still get higher in the short term as bond sales lead to more bond sales,” said Shane Oliver, head of investment strategy at AMP.
“The longer this takes, the greater the risk of a more severe correction in the stock markets if earnings improvement is struggling to keep up with the rise in bond yields.”
Markets hedged the risk of a previous Federal Reserve rate hike, although officials this week promised that each step would be in the future.
Fed fund futures are now almost fully priced for an increase to 0.25% in January 2023, while Eurodollars have discounted it for June 2022.
Even the thought of an eventual end to super cheap money sent shivers to global stock markets, which regularly hit record highs and pushed up valuations.
“The fixed income route is shifting to a more lethal phase for risky assets,” said Damien McColough, Westpac’s chief interest rate strategy.
“For a long time, the rise in interest rates was mainly seen as a story of improving growth expectations, possibly filling up risky assets, but the overnight movement included notably a sharp rise in real interest rates and raising the expectations of the Fed. “
Japan’s Nikkei was down 4%, the biggest one-day drop since April, and Chinese blue chips joined the retreat with a 2.4% drop.
EMERGING SPECIES
Overnight, the Dow fell 1.75%, while the S&P 500 lost 2.45% and the Nasdaq 3.52%, the biggest drop in nearly four months for the tech-heavy index.
Tech darlings are all members, with Apple Inc, Tesla Inc, Amazon.com Inc, NVIDIA Corp and Microsoft Corp the biggest drag.
All of that added to the importance of US personal consumption data expected later on Friday, including one of the Fed’s favorite inflation measures.
Core inflation is expected to fall to 1.4% in January, which could help calm market fears, but any upside surprise would likely accelerate the bond routine.
The surge in government bond yields disrupted emerging markets, which feared that better yields in the United States would attract money.
Preferred currencies for leveraged carry trades all suffered, including the Brazilian real, Turkish lira and South African rand.
The flows helped push the US dollar broader, with the dollar index rising to 90,390. It also made gains on the low-yielding yen, briefly hitting its high since September at 106.42. The euro brought in slightly less to $ 1.2144.
The rise in yields has eroded gold, which does not offer a fixed return, and it fell 0.1% to $ 1,767.81 an ounce after previously falling to its lowest since June 26.
Oil prices fell amid a higher dollar and the expectation of more supply.[O/R]
US crude oil fell 1.5% to $ 62.57 a barrel and Brent also lost 1.3% to $ 66.02.
Additional reporting by Swati Pandey in Sydney; Adaptation by Sam Holmes, William Maclean