Shares staunch bleed after worst selloff since January

Investors sought to staunch the bleed on Wednesday after world stocks suffered their worst rout since January, while US and European borrowing costs raced to their highest in months.

Asia managed to slow the falls and the pan-European STOXX 600 index (.STOXX) bounced 1 per cent in early trading after shedding 2.2 per cent on Tuesday and after all three major Wall Street indexes suffered their steepest drops since mid-July.

The global benchmarks for borrowing costs - the yields on US and German government bonds - edged lower, with traders waiting to hear from the heads of the European Central Bank, the US Federal Reserve, Bank of Japan and Bank of England later.

“The question that will come in the next 10 days is will the US Treasury yield keep pushing above 1.5 per cent,” said Societe Generale strategist Kenneth Broux.

“That was a sort of breaking point for broader risk assets when stops went off and the selloff started accelerating.”

Broux said the question for October and the rest of the year would be whether inflation pressures started to abate. “The 1.5 per cent level (on US Treasuries) is really pivotal,” he said.

In the currency markets, the run up in yields, prompted by signs the Fed wants to start cutting stimulus by the end of the year, saw the dollar touch an 18-month high against the yen and set its highest level of the year versus other major peers too.

Doubts are re-emerging about the global recovery at a time when the Fed is set to taper stimulus and the US administration is stuck in debt ceiling talks that could lead to a government shutdown. China is also grappling with a power crunch that has hit its economic output.

MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) fell 0.84 per cent and was heading for a 9.4 per cent decline for the third quarter, its worst quarterly performance since the first three months of 2020, when global markets were roiled by the initial spread of Covid-19.

World stocks are heading for their first red quarter since the peak of Covid panic, while the dollar is on course for its best year since 2015 and gas and energy prices have surged.

Coffee is up 25 per cent for second quarter in a row. The Baltic Dry index of global freight prices has surged 40 per cent to add to 50 per cent and 65 per cent rises in previous two quarters, while China’s woes have seen iron ore slump 45 per cent, which will be its worst quarter on record.

“We still see inflation as a risk, but our base case is that it will be transitory and come back to more normal levels during next year,” said Osman Sattar, S&P Global’s Director for EMEA Financial Institutions.

But companies face pressure on margins as higher energy prices are locked into next year’s bills.