Global shares stall as bond markets reprice rate expectations

Borrowing costs in government bond markets rose and share markets stalled on Thursday after a surprise interest rate hike in Canada gave investors their second reminder of the week that the surge in global interest rates isn’t done yet.

Asian markets had struggled overnight and the cautious mood continued in Europe as London’s FTSE (.FTSE), Germany’s DAX (.GADXI) and the France’s CAC40 (.FCHI) gradually crawled higher after starting off in the red.

Traders were being driven by a broad repricing going on in the bond markets of when and where interest rates in the world’s biggest economies are likely to max out, reported Reuters.

In an almost carbon copy of a surprise rate rise in Australia this week, Canada caught markets off guard on Wednesday by hiking its interest rates to a 22-year high of 4.75% due to an overheating economy and stubbornly high inflation.

US 10-year Treasury yields, the benchmark for global borrowing costs, was back over 3.8% again , while in Europe Germany’s 2-year yields topped 3% for the first time since March, albeit briefly. “The main theme to everything out there is the bond selloff and the realisation that the pause (in the rate hiking cycles of central banks) doesn’t mean the end,” said Societe Generale strategist Kit Jukes.

“We are definitely repricing rate expectations higher,” he added, explaining that traders were also now questioning the long-held view that the U.S. Federal Reserve would end its rate hike cycle well before the European Central Bank. The Fed, ECB and Bank of Japan all have interest rate decisions next week.

Tapas Strickland, head of market economics at NAB, said the steps from BoC and RBA meant U.S. inflation data on Tuesday will be pivotal for whether the Fed hikes this month or skips a move as widely expected.

The dollar fell slightly on Thursday but remained near to a three-month high following a more than 2.5% rise against the world’s other top currencies over the last month.

Markets are now pricing in a 64% chance of the Fed standing pat next week, compared with 78% just a day earlier, the CME FedWatch tool showed. Traders are largely expecting a 25 basis point hike in July though.

“The view here was that if both Australia and Canada felt the need for further hikes, in all probability the Fed would too,” said Chris Turner, head of markets at ING.