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Bond yields resumed their rise on Thursday as investor bet on aggressive global interest rate hikes, while the euro climbed after a heated TV debate saw French President Emmanuel Macron bolster his weekend re-election hopes.
MSCI’s main world stock market index barely mustered a move amid the prospect of higher global borrowing costs, but Paris stocks scored a 1.1 per cent jump after Wednesday evening’s clash between Macron and far-right rival Marine Le Pen.
Although Le Pen came across as more polished and composed than in a TV duel for the presidency in 2017, Macron needled her over her ties to Russia’s leadership, her plans for the economy and her policy for the European Union.
One poll showed 59 per cent of viewers thought Macron had been the most convincing in the nearly three-hour-long tussle, suggesting his pre-debate 56 per cent-44 per cent lead in the race had at least been maintained ahead of Sunday’s runoff vote.
“Yes, Emmanuel Macron won but his adversary has avoided a repeat of last time’s disaster,” Gerard Araud, a former French ambassador said on Twitter. “This debate doesn’t disqualify her like the one in 2017, but it doesn’t help her close the gap either.”
Investors were otherwise back to focusing on the war in Ukraine and how fast interest rates will have to rise around the world as the conflict with Russia adds to what were already intense global inflationary pressures.
Most 10-year bond yields across Europe rose sharply again, with Germany’s benchmark Bund yields heading back towards a seven-year peak and Italy’s hitting their highest since March 2020’s initial COVID panic.
Markets are expecting at least another half-percentage-point rate hike from the US Federal Reserve next month while one European Central Bank policymaker had said on Wednesday that it might start hiking euro zone rates as early as July.
Citi’s Global Markets Strategist Matt King said that the pressure for markets was also coming from quantitative tightening, or QT - the process of years of frantic central bank money-printing going into reverse.
That process is just about to start and over the next year he estimates it will see around half a trillion dollars being sucked out of the global financial system by the US Fed alone.
“Don’t look at the real yields, look at the liquidity flow,” King said, adding that a rough calculation was that $1 trillion of QT would knock global stocks down by around 10 per cent. “These flows are just too big for markets to anticipate ahead of time,” he said.
Spillovers
Asia markets saw Chinese and Hong Kong stocks hit month lows overnight and China’s yuan also fell to its lowest in six months as Shanghai authorities said tough Covid-19 restrictions would remain in place.
Chinese blue chips shed 1.8 per cent while Hong Kong stocks fell 2 per cent, both falling to their lowest level since mid-March. The spot yuan touched 6.4478 per dollar, its softest level since October.
The declines pulled MSCI’s broadest index of Asia-Pacific shares outside Japan 0.6 per cent lower, despite gains in Korea and Australia, where the local benchmark rose 0.4 per cent to not far off a record peak.
Japan’s Nikkei also jumped 1.2 per cent as the yen hovered near its recent 20-year low.
Analysts at Nomura said they were cutting their Q2 China GDP growth forecast to 1.8 per cent year-on-year from 3.4 per cent, “owing to rapidly worsening high-frequency activity data in April, the rising number of cities under full and partial lockdowns, severe logistics disruptions, and signs that Beijing is unlikely to end its zero-Covid strategy soon.”
A prolonged slowdown in China would have substantial global spillovers, International Monetary Fund Managing Director Kristalina Georgieva said on Thursday, while adding that Beijing has room to adjust policy to provide support.
Deutsche Bank’s chief economist David Folkerts-Landau meanwhile warned that a late-2023 US recession was now a baseline scenario.
“Prepare for a hard landing,” he said, flagging the possibility of a Fed funds rate in the 4.5-5 per cent range and euro zone rates at 2-2.5 per cent.
