Global Shares Hit Two-Month Lows as Bond Yields Remain High
On Friday, global shares reached their lowest point in two months, while US government bond yields remained near 16-year highs. This comes as investors anticipate that interest rates will remain elevated for a longer period, with concerns about China’s shadow banking sector also contributing to the downturn.
The US dollar was set for its fifth consecutive winning week, marking its longest winning streak in 15 months. This has been supported by the expectation of high borrowing costs or potential further increases, coupled with the absence of any signs of a hard landing for the US economy that could impact corporate earnings.
Crude oil, on the other hand, was poised to snap a seven-week winning streak due to China’s slowing economic growth and the possibility of additional US rate hikes, which have dampened investor sentiment.
The negative market sentiment has also affected cryptoassets, with bitcoin hitting a fresh two-month low.
Jason Da Silva, the director of global investment strategy at Arbuthnot Latham, noted that stock markets are bearing the brunt of surging bond yields, despite previous rate hikes, as economic data from the US continues to exceed expectations.
The MSCI All Country stock index fell 0.3%, hitting its lowest point since early June after a 5.85% decline in August. Nonetheless, it remains up 10.2% for the year.
Additionally, ten-year US Treasury yields dipped 7 basis points to 4.2329%, after surging approximately 30 basis points this month alone to a 10-month peak of 4.3280%, nearing the highest levels since 2007.
Euro zone government bond yields also eased as concerns about the global economy led investors to seek refuge in safe-haven government bonds. Britain’s 10-year bond yield rose to its highest since 2008 at around 4.76% on Thursday.
Da Silva commented that the surge in bond yields suggests that interest rates may need to remain high for an extended period. If economic growth picks up significantly, there may be a need for further tightening, which stock markets do not favor.
The release of minutes from the Federal Reserve this week revealed that most members of the rate-setting committee see significant upside risks to inflation. This suggests that more rate hikes may be on the horizon.
Da Silva reassured investors, stating that a stock market pullback following strong gains earlier in the year is expected and that concerns should only arise if there is a recession. However, given the robust US data, a recession is unlikely to occur in the near future.
Next week, the Federal Reserve and other major central banks will gather in Jackson Hole, Wyoming for their annual conference. Investors will closely analyze a speech from Fed Chair Jerome Powell on August 25 for insights into potential rate hikes.
As a result, the markets have already started to scale back rate cut expectations for next year. S&P 500 futures and Nasdaq futures were slightly weaker.
Investors are closely monitoring the liquidity crunch that appears to be spreading to China’s shadow banking sector. Zhongzhi, a major Chinese asset manager, has informed investors about the need to restructure its debt.
In Asia, MSCI’s broadest index of Asia-Pacific shares, excluding Japan, fell 0.9% to approach nine-month lows. It recorded a total loss of over 3% for the week, marking the third consecutive week of declines for the index.
Chinese blue-chips dropped by 1.2%, and Hong Kong’s Hang Seng Index slumped by 2%, heading for the biggest weekly losses in two months.
The technology sector also experienced a significant decline of 3.6%, likely influenced by reports that Washington is investigating electric-vehicle batteries and other car parts to eliminate US connections to forced labor in Chinese supply chains.
Shares of Chinese property developers listed in Hong Kong also fell by 2% after China Evergrande filed for protection from creditors in a US bankruptcy court.
Jonas Goltermann, deputy chief markets economist at Capital Economics, remarked that China’s economy, which was initially thriving at the beginning of the year, has gradually worsened and now appears quite bleak.
Onshore yuan saw a slight recovery from its nine-month low after the central bank set the daily fixing higher than expected to bolster the currency. Traders remain vigilant for any direct intervention by Beijing or state-owned banks.
Japan’s Nikkei also experienced a 0.5% loss, with a weekly drop of 3.1%. Data released on Friday revealed that Japan’s core inflation slowed in July, reinforcing the belief that the Bank of Japan will maintain its monetary easing strategy for the foreseeable future.
The US dollar rebounded from an earlier dip and remained near a two-month peak at 103.42 against major currencies. It rose around 0.5% throughout the week.
The Japanese yen traded at 145.34 against the dollar, having faced downward pressure this week to reach a nine-month low at 146.56 per dollar as yield differentials between the US and Japan widened. However, it still approached levels that prompted Japanese authorities to intervene late last year.
Oil prices experienced a marginal decline, with Brent crude futures rising by 0.15% to $84.25 per barrel and US West Texas Intermediate crude futures increasing by 0.3% to $80.62.
Meanwhile, the price of gold rose by 0.2% to $1,892 per ounce.
(Editing by Sam Holmes, Jacqueline Wong, and Toby Chopra)