LONDON (Reuters) – World equities plunged on Monday, with expectations of faster economic growth and inflation shaking bonds and boosting commodities, while rising real yields made stock valuations appear more tense in comparison.
The MSCI World All Countries Index, which tracks stocks in 49 countries, fell 0.4% after the start of European trade.
The pan-European STOXX 600 index fell 1%, its lowest level in 10 days. Germany’s DAX, France’s CAC 40 and Spain’s IBEX 35 fell by 1% each, Britain’s FTSE 100 lost 0.85% and Italy’s FTSE MIB fell 0.9%.
S&P 500 futures fell to their lowest level since February 4, down 1% on the day.
The bonds were hampered by the prospect of a stronger economic recovery and greater indebtedness as President Joe Biden’s $ 1.9 trillion stimulus package moves forward.
Federal Reserve President Jerome Powell gives his semestral testimony to Congress this week and will likely reiterate his commitment to keeping the policy super easy for as long as it takes to raise inflation.
“The next week is relatively weak on the international data agenda, but after the recent increase in long bond yields, hearings for Fed President Powell in both chambers of Congress (Tuesday / Wednesday) will attract great interest,” he said. Elisabet Kopelman, US economist at SEB.
“The fact that the most recent increase in yields on long bonds was driven by higher real interest rates and not just inflation expectations increases the likelihood of a dovish message.”
European Central Bank President Christine Lagarde is also expected to sound peaceful in a speech on Monday.
Yields on 10-year Treasury bills have already reached 1.38%, breaking the psychological level of 1.30% and taking the hike up to steep 43 basis points so far this year.
BofA analysts note that 30-year bonds have returned -9.4% in the year so far, the worst start since 2013.
“Real assets are outpacing financial assets by 21, as cyclical, political and secular trends indicate higher inflation,” analysts said in a note. “Rising products, energy laggards in vogue, materials in secular leaks.”
Earlier in Asia, the broader MSCI index for Asia Pacific stocks outside Japan fell after falling from a record high last week, with the jump in US bond yields bothering investors.
Japan’s Nikkei recovered 0.8% and South Korea 0.1%, but Chinese blue chips lost 1.4%.
A COPPER RECOVERY
One of the stars has been copper, a key component of renewable technology, which rose 7.7% last week to a nine-year peak. The broader base metals index LMEX rose 5.5% in the week.
Oil prices followed the rise, helped by tightening supplies and freezing weather, giving Brent gains of 22% so far this year. [O/R]
On Monday, Brent oil futures rose 0.7% to $ 63.33 a barrel. US crude oil added 0.7% to $ 59.65.
All of this has been a blessing for commodity-linked currencies, with Canadian, Australian and New Zealand dollars on the rise in the year so far.
The pound sterling peaked in three years at $ 1.4050, aided by one of the fastest vaccine implementations in the world. British Prime Minister Boris Johnson is expected to chart a course from the COVID-19 blockades on Monday.
The US dollar index has been relatively limited, with downward pressure on the country’s expanding twin deficits balanced by higher bond yields. The last index stood at 90,342, not far from where the year started at 90,260.
The increase in Treasury yields helped the dollar to gain against the yen to 105.60, as the Bank of Japan is actively restricting income at home.
The euro was stable at $ 1.2104, trapped between support at $ 1.2021 and resistance at around $ 1.2169.
One commodity that is not doing so well is gold, partly because of rising bond yields and partly because investors question whether cryptocurrencies can be better protection against inflation.
Gold was at $ 1,793 an ounce, having started the year at $ 1,896. Bitcoin fell 3.3% on Monday at $ 55,535, but started the year at $ 32,216.
Reporting by Ritvik Carvalho; additional reporting by Wayne Cole in Sydney; edition by Larry King