A major selloff in equities and especially bonds seems to be underway around the world.
The selling in equities accelerated overnight, led by a 4% slide in China, and falls of 2% or more in markets in Germany, France, Spain and Italy, while the London market was down 0.8% – a worrying fall two days out from the very close general election.
The Aussie dollar ended well under 80 – US cents this morning, the US dollar was weaker, gold rose $US5 an ounce and US oil prices joined Brent crude in topping the $US60 a barrel level for the first time in nearly five months this morning.
But those gains were isolated to commodities as the selling waves swept over Wall Street and the Dow, the S&P 500 and Nasdaq were down by 0.8% to 1.5% at the close.
And our market is looking at a fall of 50 plus points on the overnight futures market this morning After the volatile day’s trading here yesterday as the local market jumped almost 1.3%, fell, rose again on the RBA rate cut and then tailed away.
And bond markets sold off for the seventh day in a row overnight the most worrying development given the boom in markets has been concentrated in bonds in Europe (Germany), the US, Japan and Australia where the rate cut had no impact on 10 year bond yields, which ended at 2.80% overnight, up 10 points on the day and 40 points in the past week – a significant fall in price.
German bonds rose to 0.52% – early last month they hit an all time low of 0.005%. US 10 year Bonds yields traded around 2.17% – they were around 1.84% early last month.
According to Bloomberg data, the past month have seen yields on UK 10-year bonds are up 42 basis points to 1.97% (the tight election is having an impact), while similar bonds from Italy and Spain are up 27 and 33 basis points to 1.80% and 1.77%, respectively.
The sell-off has not been limited to Europe, however, with yields on Australian, South Korean, New Zealand, Canadian and US 10-year government bonds rising 20 to more than 30 basis points over the past month or so, which much of the selling happening in the last week.
The sell-off in bonds has accelerated in the past week – despite no sign of an agreement with Greece on its refinancing – a situation that would normally drive investors to German and US bonds. That is not happening. US bond yields hit their highest level in two months early today.
Driving some of the sell off in Europe has been the realisation that deflation is disappearing – leaving Greece’s financial woes as the major factor – and the uncertainty about what happens in the UK after tomorrow night’s election.
Shanghai shares suffered their second largest daily fall this year yesterday, as worries about margin trading put an abrupt halt to the market’s 39% year-to-date surge.
The Shanghai Composite Index lost 4.06% at 4298.71, its biggest daily percentage loss since January 19, when the market plunged 7.7% on similar fears of a clamp down on margin trading – a fear that was groundless at the time.
The losses in bonds are growing for investors who charged into them, especially in Europe, in the wake of the European central bank starting its quantitative easing program a couple of months ago.
For Australia, the rise in market bond yields will put further pressure on the banks and others who use these markets – that will increase the funding costs of the banks, especially with the Aussie dollar volatile.
Australian bond yields across the board have risen in the past month as the pressures for a sell off offshore have grown.
In the US there was a shock with the March trade deficit showing a $US15 billion rise to a six and a half year high – and triggering forecasts that it was big enough to push the US economy into negative growth for the March quarter after that small 0.2% annual growth rate was revealed last week.
