The asset class has benefited from several tailwinds since the start of the year, including a rebound in commodity prices, a restrained US dollar, and expectations that USA interest rates will remain “lower for longer”, even if the Federal Reserve decides to hike rates before the end of the year.
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The possibility of a USA rate hike this month, news that the Bank of Japan is studying ways to steepen the bond yield curve, and the lack of action at last week’s European Central Bank are all cited as possible triggers.
On a technical basis the index had been overbought in recent sessions, leaving it vulnerable to a pullback.
Australian stocks sank 2.22% at 1.30pm local time with the country’s large banking sector badly hit by suggestions that the US Federal Reserve could raise borrowing costs at its meeting next week.
The Nikkei 225 lost 1.5 per cent as the yen firmed due to risk aversion and as a selloff in JGBs sent 10-year yields to the highest since March.
European stocks and bonds fell in a volatile market on Monday, hit by growing concerns that global central banks’ commitment to the post-crisis orthodoxy of super-low interest rates and asset purchase programmes may be waning.
E-mini futures on the S&P 500 added 0.1 percent after the underlying gauge slumped 1.5 percent on Tuesday. In the United States, the market-implied probability that the Federal Reserve will increase the federal funds rate after the Federal Open Market Committee meeting September 20-21 has doubled over the past month; however, even after doubling off a low base, the market is still pricing in only a 24% probability that the Fed will raise the rate this month.
Fed Governor Lael Brainard on Monday cautioned against removing support for the US economy too quickly. Any hint of hawkishness would likely further pressure bonds and equities. “The rest of the market participants have had to simply react”.
“The thinking is that if someone as dovish as she is starts talking like a hawk, people will notice”.
“Brainard’s was the last speech before the blackout period ahead of the Fed meeting, and she is very close to Yellen”. An index of market volatility soared to its highest level in three months.
The benchmark U.S. S&P 500 stock index lost 2.5 percent on Friday – its biggest fall in almost three months – while yields on USA 10-year and 30-year paper spiked to 11-week peaks.
The yield on the benchmark 10-year bond, which moves inversely to its price, rose 3 basis points to 0.044 percent, the yield on long-term 30-year note jumped more than 2 basis points to 0.627 percent and the yield on short-term 2-year bond climbed 1 basis point to -0.619 percent by 09:10 GMT.
The yield on benchmark German debt, for instance, had turned positive for the first time since July 22 and ended at 0.02 per cent, its highest since June 23.
The Aussie has lost 2.25 per cent against the yen in two sessions to stand at 76.52, while the Japanese currency was firm on the USA dollar at 102.06.
The euro was sidelined on the dollar at $1.1239 after weak German trade data dragged it down from $1.1271 on Friday.
Adding to Monday’s jittery mood, Democratic presidential candidate Hillary Clinton fell ill at a September 11 memorial ceremony and had been diagnosed with pneumonia.
Markets have generally assumed Clinton would win the presidency and have not properly priced the implications, both economic and for national security, should Donald Trump prevail.
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That storm, according to Parry, includes geopolitical risks from North Korea’s nuclear test on Friday and trading disruptions in China because of festival holidays later this week.
