Monday 19 February 2018

Shares, bonds extend losses on Fed, China worries

GLOBAL equities, bond prices and commodities tumbled on Monday, entering another week of heavy selling as investors fled markets on worries about the U.S. central bank's plans to scale back its bond buying, combined with tighter financial conditions in China.

Prices of U.S. Treasuries resumed their slide, and benchmark yields climbed to a nearly two-year high. The S&P 500 fell more than 2pc, erasing all of its quarterly gains as Wall Street joined a global selloff after concerns about a liquidity crunch in China sent Shanghai stocks down more than 5pc.

The shift out of assets that have benefited most from cheap money has been sharpest in the U.S. debt market, where yields on 10-year Treasury notes spiked to two-year highs of 2.6pc on Monday. The 10-year note yield has risen a full percentage point in a little more than a month.

"The exit door is not that big and everyone's going at the same time," said Justin Lederer, strategist at Cantor Fitzgerald in New York. "This is not just about a Treasury backup, this is a global, everyone-getting-out-of-everything."

The broad selloff added to more than $1 trillion in losses in global equity markets in the five days ended June 21, based on the market value of the MSCI World Index.

The U.S. stock market alone lost about $354.4bn during the five-day period, while the U.S. bond market erased about $390.8bn, measured by the market value of the BofA/Merrill Lynch Broad Market Index.

The declines stem from the Federal Reserve's signal last week that the era of cheap central bank money - which caused many assets to hit record highs - was coming to an end. But they have been exacerbated by China's battle to transition to a lower-growth economy.

Both events are unprecedented and have driven a sharp rise in risk aversion by investors fearing a long period of volatility across markets.

The yield on two-year U.S. Treasury notes rose to 0.433 percent on Monday, its highest level since July 2011. The benchmark 10-year U.S. Treasury note was down 13/32, the yield at 2.5892pc.

This rise, and the brighter outlook for the U.S. economy, which was behind the Fed's decision, has favored the dollar against most major currencies. The dollar index, was up 0.2pc at 82.556 after rising as high as 82.841, its highest since June 5. The gains built on last week's 2.2pc rally, the biggest weekly rise since November, 2011.

"The hardest hit is no doubt the bond market. The decline that we have seen in the past four weeks in the bond market would be equivalent to a 30-35 percent decline in the stock market, considering bonds are traditionally not volatile," said James Dailey, senior portfolio manager at Team Asset Strategy Fund in Harrisburg, Pennsylvania.


U.S. stocks extended their losses on Monday, adding to the S&P 500 index's biggest weekly decline in two months as investors repriced shares in the wake of the Federal Reserve's plans to withdraw its stimulus.

Investor sentiment also was hurt by a cash crunch in China, which could further slow Chinese growth. Markets in Shanghai and Hong Kong posted their biggest daily losses in almost four years.

"We are starting to see that follow-through in Asia, which is all part of the broader narrative - the focus on a lack of stimulus, a creeping higher in rates and the potential impact for less liquidity globally," said Peter Kenny, chief market strategist at Knight Capital in Jersey City, New Jersey.

The Dow Jones industrial average was down 223.22 points, or 1.51pc, at 14,576.18. The Standard & Poor's 500 Index was down 30.29 points, or 1.90pc, at 1,562.14. The Nasdaq Composite Index was down 57.77 points, or 1.72pc, at 3,299.48.

As investors retreated into the dollar, share markets tumbled, with the falls heaviest in many of the world's major emerging markets.

MSCI's benchmark index for stocks in the emerging world fell 2.1pc extending losses for a fifth straight day to touch one-year lows.

The rise in Treasury yields and better prospects for the U.S. economy have undermined the attraction of emerging markets, as China's efforts to clean up its banking system and switch to a slower growth trajectory raises fears of greater instability.



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