Fed unease sends shares lower
Increased bond market borrowing costs sparks move away from riskier assets
World shares slid to their lowest level in more than a month and emerging markets fell for the fourth straight day today.
World shares slid to their lowest level in more than a month and emerging markets fell for the fourth straight day today, as concerns about an expected cut in US stimulus and related gains in bond yields escalated.
US stock index futures, however, signalled a steadier tone ahead on Wall Street - after major indexes posted their longest losing streaks of the year - helping drag many markets off their lows.
Europe’s main stock markets were down 0.8 per cent by midday, near a two-week low, while emerging stocks fell 1.3 per cent to trade at a five-week low, though both indexes had recovered slightly during the morning session.
The selling has been the result of rising expectations that the US Federal Reserve will start winding down its $85 billion-a-month support programme next month.
The prospect has driven up bond market borrowing costs, which in turn has sparked a move away from the riskier assets that have soared over the last few years thanks to the extra liquidity.
The pressure is unlikely to be alleviated ahead of tomorrow’s release of minutes from the most recent Fed meeting, which investors will be scouring for fresh hints on when the process may begin.
Ahead of their release, though, the relentless rise in US government bonds yields, which sent benchmark 10-year debt to a two-year high of 2.9 per cent on Monday, has slowed down slightly. The benchmark 10-year note yield had edged down to 2.88 per cent ahead of the US start.
As has been the recent pattern, German government bonds, Europe’s equivalent benchmark, moved in lock step with yields , easing to 1.87 per cent after topping 1.9 per cent a day earlier.
On European share markets, a 10.8 per cent jump to 19.40 points in the Euro STOXX 50 Volatility Index indicated uncertainty over the near-term outlook, though the measure remained below its 2013 peak of 26.80 points.
Ramin Nakisa, a global macro strategist for UBS in London, said market turbulence was bound to pick up further as the Fed starts to switch policy direction.
“We expect volatility... People will start to wonder whether there is anything in the fixed-income world that really is safe,” he said, adding that there was also likely to be another short selloff in share markets.