Global equities and bonds take a further beating

World stocks were on track for their longest losing streak in two years on Thursday as the sight of oil prices heading for $100 a barrel compounded concerns about persistently high global interest rates.

There was brief respite from the dollar’s strength in the currency markets though it was Wednesday’s big drop in US crude stocks that jangled the nerves of another supply-side shock just when the global economy needs it least.

West Texas Intermediate had hit $95 a barrel for the first time since August 2022 while Brent prices were nudging up in early London trading again after they had hit a one-year high of $97.69.

That hoisted Europe’s oil and gas stocks to the cusp of the highest since 2014, while the prospect of higher energy costs and sticky inflation piled pressure on bond markets.

Ten-year US Treasury yields, which are the benchmark of global borrowing costs, were above 4.6% for the first time since 2007 having started September at 4%. Higher yields translate into bigger interest payments on the debt. 

Yields on Germany’s AAA-rated bonds were going higher again while Italy’s news on Wednesday that its budget deficit was widening again sent its shorter-term 2-year yields to a fresh 11-year high.

“What we have got is a beautiful inflection point,” said Peter Chatwell, head of global macro strategies trading at Mizuho. Markets were now sensing that both economic growth and inflation could stay strong next year, he added.

“The repricing is applying some stress to credit spreads as well as other things,” Chatwell said. “If the higher rate environment persists it’s potentially much more difficult to keep debt levels stable.”

Traders were also watching US lawmakers’ efforts to avoid a another government shutdown in Washington.

With European stocks down 0.4% and US S&P 500 futures also lower, MSCI’s main global equities index, which tracks 45 countries, was on course for its 10th straight daily fall, a losing streak not seen since 2021.

MSCI’s index of Asia-Pacific shares outside Japan ended near a 10-month trough, while Japan’s Nikkei fell 1.5% as investors preparing for the end of the third quarter sold stocks that went ex-dividend.

The strong dollar has the yen within a whisker of ¥150/$, seen as a level likely to provoke an official response or intervention.

The yen was hovering around ¥149.40/$ on Thursday. The euro was licking its wounds too at $1.0517, having dropped to a nine-month low of $1.0488 in the previous session.

German institutes predicted its economy will shrink 0.6% this year and Spanish data shows headline inflation there has risen to 3.5% again this month due to the soaring cost of energy.

A number of central banker appearances are coming later in the day, most notably Federal Reserve chair Jerome Powell at 8pm GMT.

China break

Chinese markets had limped towards a holiday that starts on Friday. The break may be a welcome one for traders after weeks of bad news in the country’s struggling property sector.

Shares in the poster child of the troubles, China Evergrande, were suspended from trading in Hong Kong after a report that chair Hui Ka Yan was under police watch. The stock, once worth more than HK$30 (R73.53), is now near HK$0.30.

Investors fear a liquidation would further damage the embattled property market and stifle tentative green shoots elsewhere in the Chinese economy.

“China’s property-sector stress will continue to pose cross-sector credit risks in the near term,” said Fitch Ratings on Thursday. “The government’s modest policy easing to date is unlikely to drive a sharp turnaround in homebuyers’ sentiment.”

The Hang Seng fell 1% and is close to a 10-month low. The mainland CSI300 fell 0.2%.

The yuan is also coming under pressure and only a very strong fixing of its trading band has held off sellers. The yuan last changed hands at ¥7.3057/$, not far from the weaker extremity of its trading band.

Higher energy prices helped the Australian dollar to stabilise at $0.6378.

Gold though was heading for its worst week since February as the rise in Treasury yields drives investors out of the precious metal, which pays no yield. It nursed losses at $1,875/oz.

Reuters