LONDON—Bond markets suffered another sharp sell-off on Thursday as investors bet on aggressive global interest rate hikes, while the euro climbed after French President Emmanuel Macron bolstered his weekend re-election hopes in a heated TV debate.
MSCI’s world stocks index mustered only a modest move amid the prospect of higher global borrowing costs, but Paris stocks skipped nearly 2 percent higher after Wednesday evening’s clash between Macron and right rival Marine Le Pen.
Although Le Pen came across as more polished and composed than in a TV duel for the presidency in 2017, Macron needled her over her ties to Russia’s leadership, her plans for the economy, and her policy for the European Union.
One poll showed 59 percent of viewers thought Macron had been the most convincing in the nearly three-hour-long tussle, suggesting his pre-debate 56 percent-44 percent lead in the race had at least been maintained ahead of Sunday’s runoff vote.
“Yes, Emmanuel Macron won but his adversary has avoided a repeat of last time’s disaster,” Gerard Araud, a former French ambassador said on Twitter. “This debate doesn’t disqualify her like the one in 2017, but it doesn’t help her close the gap either.”
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.
With European Central Bank and Federal Reserve chiefs Christine Lagarde and Jerome Powell also speaking on an International Monetary Fund panel later, Germany’s 10-year Bund yields were heading back towards a seven-year peak, U.S. Treasuries neared 2.9 percent again, while Italy’s yields hit their highest since March 2020’s initial COVID-19 panic.
Markets are expecting at least another half-percentage-point rate hike from the U.S. Fed next month while one ECB policymaker said on Wednesday it might start hiking eurozone rates as early as July.
Citi’s Global Markets Strategist Matt King said the pressure for markets 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 around half a trillion dollars 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 a rough calculation was that $1 trillion of QT would knock global stocks down by around 10 percent.
“These flows are just too big for markets to anticipate ahead of time,” he said.
Spillovers
U.S. stock futures were pointing higher as electric carmaker Tesla’s shares surged nearly 8 percent in pre-bell jockeying after strong results and as United Airlines predicted a surprise profit, which boosted the stocks of other carriers too.Asia markets, in contrast, saw 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 percent while Hong Kong stocks fell 2 percent, both falling to their lowest level since mid-March. The spot yuan touched 6.4478 per dollar, its softest level since October.
The declines had pulled MSCI’s broadest index of Asia-Pacific shares outside Japan 0.6 percent lower, despite gains in Korea and Australia, where the local benchmark rose 0.4 percent to not far off a record peak.
Japan’s Nikkei had also jumped 1.2 percent as the yen hovered near its recent 20-year low.
Analysts at Nomura said they were cutting their Q2 China GDP growth forecast to 1.8 percent year-on-year from 3.4 percent, “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 Managing Director Kristalina Georgieva said on Thursday, while adding that Beijing has room to adjust policy to provide support.
Deutsche Bank’s chief economist David Folkerts-Landau, meanwhile, warned a late-2023 U.S. recession 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 percent range and eurozone rates at 2–2.5 percent.
Deutsche Bank also noted the extent of Fed hikes priced in by December had hit a fresh high of 227 basis points (bp). When added to the 25 bp hike from last month, that implies the Fed will tighten by more than 260 bps for the year as a whole—more than the 250 bps seen back in 1994.
Treasury 10-year yields had dived 11 bps on Wednesday, but were back up to 2.874 percent in Europe. Nasdaq futures were also up over half a percent as the upbeat Tesla earnings helped ease the stress of Netflix’s brutal slump this week.
The streaming company’s losses now stand at 62 percent this year, making it the worst performer in the entire S&P 500 on a year-to-date basis.
In the currency markets, the euro rose as much as 0.6 percent to above $1.09 again, and also chalked up gains versus the yen, Swiss franc, and Norwegian crown.
The dollar, meanwhile, gained 0.2 percent on the yen which has hit 20-year lows in recent days, hurt by the Bank of Japan’s 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.
Oil, meanwhile, firmed in choppy commodity trading as concerns about supply due to a potential European Union ban on Russian oil came to the fore.
Brent crude futures rose 1.54 percent to $108.44 a barrel, although European natural gas prices fell 1.2 percent 96.5 euros.
