LONDON (Reuters) – Global equities fell on Friday, with a sharp drop in Asian equities in nine months as falling global bond markets produced volatile returns and scared investors amid fears that serious losses they suffer could lead to distressed sales of other assets.
MSCI’s Emerging Markets equity index suffered its biggest daily drop in nearly ten months and was 2.7% lower, while European stocks opened in the red, with the STOXX 600 a 0, 7%, recovering from the strongest losses of the session.
The MSCI Global Equity Index, which tracks stocks in 50 countries, was 0.9% lower and headed for the worst week of the month.
Asia recorded the heaviest sales, with MSCI’s broadest Asia-Pacific stock index outside of Japan shifting more than 3% to a one-month low, its percentage loss d ‘a stronger day since May 2020.
For the week, the index has fallen more than 5%, the worst weekly show since March last year, when the coronavirus pandemic had sparked fears of a global recession.
“It’s not the beginning of an equity correction, plus a logical consolidation, as the price-to-earnings ratios were excessive,” said Francois Savary, chief investment officer of Swiss manager Prime Partners.
“What’s reassuring is that fourth-quarter 2020 earnings were good and earnings per share surprisingly good, and that means we should return to growth.”
Friday’s massacre was triggered by a whiplash in bonds.
The magnitude of the sale prompted the Australian central bank to launch a surprise bond purchase operation to try to prevent the bleeding.
The European Central Bank is monitoring the recent rise in the costs of government bond debt, but will not try to control the yield curve, ECB chief economist Philip Lane told a Spanish newspaper.
On Friday, yields on ten-year German government bonds fell nearly 4 basis points to -0.267%, and French and Austrian bonds fell back into negative territory.
10-year Treasury bill yields fell to 1.4530%, from a one-year high of 1.614% on Thursday.
“Bond yields could still increase in the short term, although bond sales are generating more bond sales,” said Shane Oliver, AMP’s head of investment strategy.
“The longer it continues, the greater the risk of a more severe correction in the stock markets if earnings updates struggle to keep up with rising bond yields.”
Markets were covering the risk of a previous Federal Reserve rate hike, although officials this week promised any measures would be long in the future.
Futures on Fed funds now have an almost total price for a 0.25% rise in January 2023, while Eurodollars have it discounted for June 2022.
Even the idea of a final end to super cheap money caused shudders across global stock markets, which have been regularly reaching all-time highs and stretching valuations.
“The fixed income routine is becoming a more lethal phase for risky assets,” says Damien McColough, head of rates strategy at Westpac.
“Rising yields have long been seen as a history of improving growth expectations, at least that clarifies risky assets, but the overnight move mostly included a sharp rise in real rates and an advance in Fed withdrawal expectations “
The Japanese Nikkei fell 4%, the biggest single-day drop since April, and Chinese blue chips joined the pullback with a 2.4% drop.
EMERGING ROPES
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 of the heavy technology index .
All technology lovers suffered, with Apple Inc., Tesla Inc., Amazon.com Inc., NVIDIA Corp. and Microsoft Corp. the biggest drags.
All of this raised the importance of U.S. personal consumption data to be released later Friday, which includes one of the Fed-favored inflation measures.
Core inflation is expected to fall to 1.4% in January, which could help calm market anxiety, but any upside surprise would likely accelerate the fall in bonds.
Rising Treasury yields led to reductions in emerging markets, which feared that better supply yields in the United States could attract funds.
All leverage-favored currencies, including the Brazilian real, the Turkish lira and the South African rand.
Flows helped propel the U.S. dollar more broadly, with a dollar index rising to 90,390. It also gained in the low-yielding yen, briefly reaching its highest since September, at 106.42. The euro eased a touchdown to $ 1.2144.
The jump in yields has stained gold, which offers no fixed yield, and dragged it down 0.1% to $ 1,767.81 an ounce, as it had previously fallen to its lowest level since June 26th.
Oil prices fell by a higher dollar and expectations of more supply.[O/R]
U.S. crude fell 1.5% to $ 62.57 a barrel and Brent also lost 1.3% to $ 66.02.
Additional reports from Swati Pandey in Sydney; Edited by Sam Holmes, William Maclean