World markets hit a wall as risk rally enters a rough patch

London — Stock market bulls were forced to a halt on Tuesday and high-flying currencies such as the euro and Australian dollar lost altitude, as a weeks-long risk rally ran into some turbulence.

It all seemed so sudden. Asian equities had scored their ninth day of gains after landmark highs by Wall Street on Monday, but Europe’s big markets opened with a 0.5% to 1.5% lurch into the red.

The euro fell 0.3% in only its second drop in 11 days, bonds were back in favour, while another barb from China in its spat with Canberra saw the Aussie dollar drop a 1% having just set a 10-month top.

“It feels like the forex market is looking at the equity market and thinking perhaps we should position for a correction,” said Société Générale strategist Kit Juckes, referring to the recent surge in global equity markets.

“It is going to depend on what the US market does today as we have the US Federal Reserve open market committee policy announcement tomorrow … `but why wouldn’t you buy some yen at this point?”

The optimism for equity markets came last week after US jobs data showed a surprise decline in the unemployment rate. Wall Street indices surged, with the Nasdaq closing at a record level on Monday.

Global markets were mauled in March amid concern over both the short- and longer-term damage to the world economy from the Covid-19 pandemic. But most indices are now back to pre-coronavirus levels.

MSCI’s broadest index of Asia shares excluding Japan advanced for a ninth straight session for its longest winning streak since early 2018. The 49-country world index is up nearly 45% from four-year lows struck in mid-March.

“The good news is that this shows central banks’ effort to stabilise the market have worked,” said Tai Hui, chief Asia market strategist at JPMorgan Asset Management.

Fears of renewed trade tensions between the US and China and the second-round impact from higher unemployment and bankruptcies are hanging over the outlook, however.

In its latest World Bank global economic prospects report on Monday, the bank said advanced economies are expected to shrink 7.0% in 2020, while emerging-market economies will contract 2.5%, their first slump since aggregate data became available in 1960.

On a per-capita GDP basis, the global contraction will be the deepest since 1945/1946, when World War 2 spending dried up.

Tuesday’s wobble in markets saw the safe-haven yen head up 0.4% to ¥107.93, while the dollar’s gains elsewhere saw the greenback index have its best spurt since May 22.

The mood had shifted in commodity markets, too. Oil prices slipped more than 1% in London after Brent had hit its highest in more than three months at $41 a barrel. Gold flipped higher as industrial metals copper, nickel and aluminium all fell.

Reuters