Global equities kicked off the week in rally mode as bond markets steadied after wild swings last week.
In Europe, the region-wide Stoxx 600 rose 1.5 per cent in early morning trading on Monday. London’s FTSE 100 benchmark gained 1.7 per cent and Germany’s Xetra Dax added 1.1 per cent. US stock-index futures also jumped, with those tracking the S&P 500 index up 1.1 per cent.
Japan’s Topix index was up 2 per cent on Monday afternoon while Australia’s benchmark S&P/ASX 200 climbed 1.7 per cent. China’s CSI 300 index of Shanghai and Shenzhen-listed stocks gained 1.5 per cent and Hong Kong’s Hang Seng added 1.6 per cent.
Rebound
The gains for European and Asia-Pacific equities followed a rebound in US government debt at the end of last week. The 10-year US Treasury yield rose modestly to 1.43 per cent on Monday after dropping 0.12 percentage points on Friday from a 12-month high the previous session.
“It’s all about bonds,” said Willem Sels, chief investment officer at HSBC’s private bank, who said expectations for a continuation of “ample” stimulus measures from global central banks provide a “powerful” boost for risk assets.
That thesis came into play on Monday when Australia’s central bank said it would purchase A$4 billion (€2.5 billion) in long-term bonds, double the usual amount as it attempts to ease a heavy sell-off that has hit its markets. It had sharply increased its purchases of short-term bonds last week as its sovereign debt endured successive waves of intense selling.
The Australian 10-year yield tumbled almost 0.25 percentage points on Monday to 1.67 per cent, marking the biggest rally since in a period of turbulent trading in global financial markets last March. It had surged as high as 1.928 per cent last week.
Volatility in global debt and equity markets has been stoked by widening concerns among investors that a broad economic recovery from the pandemic could spur inflation, prompting central banks to withdraw unprecedented monetary policy support.
Stocks
"Global real yields could rise further," said Robert Buckland, chief global equity strategist at Citigroup. "This is bad for equity markets, especially those tilted towards highly rated growth stocks."
He said this was particularly so in the US, where the valuations of big tech companies have been buoyed by low rates.
While low rates increase the current value of tech groups’ future cash flows, the present value of future earnings falls if rates rise.
Inflation expectations were heightened further at the weekend when the US House of Representatives passed President Joe Biden’s $1.9tn coronavirus stimulus package, months after earlier support measures expired.
Those expectations also fed through to commodities markets, including oil prices. Brent crude, the international benchmark, added 1.8 per cent to $65.59 a barrel while West Texas Intermediate, the US marker, rose by the same amount to $62.59. – Copyright The Financial Times Limited 2021
