Global markets focus on rates, with bonds and the euro in the spotlight

London — Bond yields resumed their rise on Thursday as investors bet on aggressive global interest rate hikes, while the euro climbed after a heated TV debate saw French President Emmanuel Macron bolster his weekend re-election hopes.

MSCI’s main world stock market index barely mustered a move amid the prospect of higher global borrowing costs, but Paris stocks jumped 1.1% jump after Wednesday evening’s TV debates between Macron and far-right rival Marine Le Pen.

Though Le Pen came across as more polished and composed than in a televised duel for the presidency in 2017, Macron needled her for her ties to Russia’s leadership, her plans for the economy and her policy for the EU.

One poll showed 59% of viewers thought Macron had been the most convincing in the nearly three-hour-long tussle, suggesting his pre-debate 56%-44% lead in the race had at least been maintained ahead of Sunday’s runoff vote.

Investors were otherwise back to focusing on the war in Ukraine and how fast interest rates will have to rise around the world as the conflict with Russia adds to what were already intense global inflationary pressures.

Most 10-year bond yields across Europe rose sharply again, with Germany’s benchmark Bund yields heading back towards a seven-year peak and Italy’s hitting their highest since March 2020’s initial Covid-19 panic.

Markets are expecting at least another 50 basis-point rate hike from the US Federal Reserve next month while one European Central Bank policymaker had said on Wednesday that it might start hiking eurozone rates as early as July.

Matt King, Citi’s global markets strategist said the pressure was also coming from quantitative tightening, or QT — the process of years of frantic central bank money-printing going into reverse.

That process is just about to start and over the next year he estimates it will see about $500bn being sucked out of the global financial system by the Fed alone.

“Don’t look at the real yields, look at the liquidity flow,” King said, adding that a rough calculation was that $500bn of QT would knock global stocks down by around 10%. “These flows are just too big for markets to anticipate ahead of time,” he said.

Spillovers

In Asia, Chinese and Hong Kong stocks hit month lows overnight and China’s yuan also fell to its lowest in six months as Shanghai authorities said tough Covid-19 restrictions would remain in place.

Chinese blue chips shed 1.8% while Hong Kong stocks fell 2%, both falling to their lowest level since mid-March. The spot yuan touched 6.4478/$, its softest level since October.

The declines pulled MSCI’s broadest index of Asia-Pacific shares outside Japan 0.6% lower, despite gains in South Korea and Australia, where the local benchmark rose 0.4% to not far off a record peak.

Japan’s Nikkei also jumped 1.2% as the yen hovered near its recent 20-year low.

Analysts at Nomura said they were cutting their forecast for second-quarter GDP in China to 1.8% year on year from 3.4%, “owing to rapidly worsening high-frequency activity data in April, the rising number of cities under full and partial lockdowns, severe logistics disruptions, and signs that Beijing is unlikely to end its zero-Covid strategy soon”.

A prolonged slowdown in China would have substantial global spillovers, IMF head Kristalina Georgieva said on Thursday, adding that Beijing has room to adjust policy to provide support.

David Folkerts-Landau, Deutsche Bank’s chief economist warned that a recession in the US  in late 2023 was now a baseline scenario. “Prepare for a hard landing,” he said, flagging the possibility of a Fed funds rate in the 4.5%-5% range and eurozone rates at 2-2.5%.

Treasury 10-year yields were down 11 bps on Wednesday, but were back up to 2.874% in Europe. Nasdaq futures were also up more than 0.5% as upbeat Tesla earnings helped ease the stress of Netflix’s brutal slump this week.

The streaming company’s losses now stand at 62% this year, making it the worst performer in the S&P 500 on a year-to-date basis.

In the currency markets, the euro rose 0.6% to above $1.09 again and also chalked up gains against the Japanese yen, Swiss franc and Norwegian krone.

The dollar gained 0.2% on the yen which has hit 20-year lows in recent days, hurt by the Bank of Japan promise to keep government bond yields pinned down despite rises elsewhere around the world.

“The euro is all about ECB drumbeat for a July hike,” said Kenneth Broux, an FX strategist at Societe Generale in London.

Reuters