Global markets calmer as recession obsession is muted

London — Calm returned to global markets on Tuesday as a steadier day for Europe and Asia’s bourses and a tick higher in benchmark bond yields helped ease nerves after a jarring few days dominated by recession worries.

European shares were just about winning the battle to avoid a fifth day of losses, the euro was holding its ground after three days of falls, and Turkey’s lira seemed to have stepped off its latest rollercoaster ride.

The bond markets remained the main focus though: 10-year German government bond yields remained below zero and key sections of the US yield curve remained inverted — where short-term borrowing costs are higher than longer-term ones.

“The world is looking to fade the risk aversion caused by the inversion of the [US] yield curve,” said Société Générale strategist Kit Juckes, adding that it was difficult to position for a hypothetical recessions anyway.

Overnight, MSCI’s broadest index of Asia-Pacific shares rebounded 0.2% after losing 1.4% in the previous session, though there were some eye-catching moves within that.

Japan’s Nikkei jumped 2.1% after recording its biggest drop since late December on Monday, India jumped more than 1%, but China’s blue-chip CSI300 index dropped more than 1% as trade war worries remained.

Wall Street was expected to start higher later although it was the bond market that was the principle focus there too. Investors have been spooked by sharp falls in US bond yields and an inversion of the US treasury yield curve, which is widely seen as an indicator of an economic recession.

The 10-year US treasury yield edged up to 2.442%, having shed five basis points on Monday and a whopping 17.5 basis points since the US Federal Reserve, last week, ditched projections for raising rates this year.

“The US yield curve continues to be inverted,” said Michael Every, Hong Kong-based senior Asia-Pacific strategist at Rabobank. “This is not a healthy sign, as bond-market watchers should know and equity-market obsessives should rapidly learn.”

Factoring in a rate cut

The US treasury department will sell $113bn in coupon-bearing supply this week, including $40bn in two-year notes on Tuesday, $41bn in five-year notes on Wednesday, and $32bn in seven-year notes on Thursday.

Investors will also be watching Fed policy makers scheduled to speak on Tuesday.

US economic growth could be “pretty weak” in the first quarter but will likely be much closer to 2% to 2.5% for the rest of the year. However, a central bank pause is the responsible thing to do, Fed Bank of Boston president and CEO Eric Rosengren said at a conference in Hong Kong.

Fed funds rate futures are now fully factoring in a rate cut later this year, with about an 80% chance of a move priced in by September.

In the currency market, the fall in US yields undermined the dollar’s yield attraction.

The euro stood firm at $1.1305, having gained a tad on Monday after Germany’s IFO Institute said its business climate index rose to 99.6, beating a consensus forecast of 98.5 and ending six consecutive months of decline.

The dollar was 0.4% higher against the yen at ¥110.14, having hit a one-and-a-half-month low of ¥109.70 on Monday, while the pound had barely budged at $1.3180 after law makers voted late on Monday to wrest further control of the Brexit process from UK Prime Minister Theresa May.

“We expect euro/dollar to stabilise around the current level of 1.13 and see a limited downside for the rest of week,” said currency strategists at ING.

Among commodities, oil prices hovered below their recent four-month peaks, as the prospect of tighter US crude supply was offset by concerns about a slowdown in global economic growth.  US crude futures traded at $59.55 a barrel, up 0.75% on the day but below Thursday’s $60.39, which was its highest level since mid-November.

Brent futures were up 0.7% at $67.73 while safe-haven gold was down a third of a percent at $1,317.60 having hit a one-month high of $1,324.60 on Monday.

Reuters