admin
A global stocks selloff deepened yesterday as concerns grew that the Federal Reserve is behind the curve with policy support for a slowing US economy, sending investors into the safety of bonds.
Japanese shares plunged as traders priced in more domestic rate hikes.
The Topix and Nikkei indexes were on the verge of a bear market, with the former set for a three-day decline that would be the worst since the 2011 Fukushima nuclear meltdown.
The yen rallied over 2 percent against the dollar. A gauge of regional shares slumped the most in over four years and set to erase this 2024’s gains. US index futures also declined.
Data on Friday showed that US non-farm payrolls recorded one of the weakest prints since the pandemic, and the jobless rate unexpectedly climbed to above the Fed’s year-end forecast, triggering a closely watched recession indicator.
Concerns on the health of the US economy sent Treasury yields lower, while spreads on investment — grade dollar bonds in Asia were set to widen the most in 22 months.
“It’s a pretty dramatic shift in narrative, which shows how much of the recent trends were backed by expectations of a US soft landing,” said Charu Chanana, head of currency strategy at Saxo Bank A/S.
“The more the US soft landing assumption gets questioned, the further pullback we could see in equities and strategies funded with the low-yielding currencies where positioning has been massively skewed.”
Japan’s benchmark 10-year bond yield fell to its lowest since April, slipping as much as 17 basis points to 0,785 percent yesterday. Mitsubishi UFJ Financial Group’s shares posted their biggest intraday drop on record as the fall in bond yields threatened to eat into loan margins.
Bond traders have repeatedly misjudged where interest rates have been headed since the end of the pandemic, at times overshooting in both directions. Global bonds erased their losses for the year, as signs of US economic deterioration fuelled demand for fixed-income.
The global equity declines reflected worries on the economic outlook, geopolitical risks and questions over whether heavy investment into artificial intelligence will live up to the hype surrounding the technology.
Economists at Goldman Sachs Group Inc. increased the probability of a US recession in the next year to 25 percent from 15 percent, although it added there are reasons not to fear a slump.
Sentiment was also weighed by news that Berkshire Hathaway Inc. had slashed its stake in Apple Inc by almost 50 percent as part of a massive second-quarter selling spree.
Asian currencies pushed higher — led by Malaysia’s ringgit — while the Mexican peso’s slump extended as traders continued to unwind emerging market carry trades.
The sudden appreciation in funding currencies, such as the yen and China’s yuan, have damaged the carry trade, which typically involves traders borrowing at lower rates to invest in higher-yielding assets.
Elsewhere, oil fluctuated near a seven-month low as a selloff in wider financial markets countered rising tensions in the Middle East. Israel is bracing itself for a possible attack from Iran and regional militias in retaliation for assassinations of Hezbollah and Hamas officials. Cryptocurrencies also reeled from risk aversion in global markets yesterday.
With just three Fed meetings left, swap pricing reflects the growing perception that the central bank will need to make an unusually large half-point move at one of the gatherings or act between its scheduled meetings — moving rapidly to bolster growth.
Still, large policy moves with an aggressive response could imply an emergency, triggering even more jitters among traders, with Goldman Sachs increasing the probability of a recession in the next year to 25 percent from 15 percent.
“From a Fed perspective, this does not translate into making hasty policy decisions, but it should help them remove the rose-tinted glasses when assessing policy decisions at the next meeting,” said Charlie Ripley at Allianz Investment Management.— Bloomberg.
Online Reporter