Global Stock Rout Intensifies, Powering Bond Rally: Markets Wrap

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(Bloomberg) — A selloff in global stocks deepened Monday as concerns grew that the Federal Reserve would delay its policy support for the slowing U.S. economy, prompting investors to seek safety in bonds. Japanese shares fell for a third straight day as traders priced in more local interest rate hikes.

Japan’s Topix index fell more than 7%, while the yen rose more than 1% on bets the Bank of Japan will continue to raise interest rates after raising them last Wednesday. Korean and Australian stocks fell, while U.S. futures fell more than 1.5%. With investors worried that the U.S. economy could be on the verge of a hard landing, rising Treasury prices have sent yields to their lowest levels in more than a year.

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The price action underscores how quickly sentiment has shifted away from expectations that the Federal Reserve will be able to engineer a soft landing for the U.S. economy. Data on Friday showed U.S. nonfarm payrolls posted one of the weakest prints since the pandemic, and the unemployment rate unexpectedly rose above the Fed’s year-end forecast, creating a closely watched recession indicator.

“It’s certainly a conspiracy to stimulate ‘risk-off’, with the Bank of Japan signalling more tightening and the Fed potentially slowing down,” said Vishnu Varathan, head of economics and strategy at Mizuho Bank in Singapore. “But for now, risk-offs and recession fears are conspiring to destroy risk appetite.”

The moves in Japan’s benchmark indexes sent stock prices down more than 20% — a loss that signals a bear market. The three-day loss is the worst since the 2011 tsunami and the meltdown at the Fukushima nuclear plant.

After Friday’s Treasury yields surged, Japan’s benchmark 10-year yield fell to its lowest since April, falling as much as 17 basis points to 0.785% on Monday. New Zealand yields fell by the same amount, while Australian bonds were closed for a bank holiday a day before the Reserve Bank of Australia’s monetary policy meeting.

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In commodity markets, oil prices extended losses on Monday amid reports that Iran may strike Israel in retaliation for the assassination of Hezbollah and Hamas officials. Saudi and Israeli stocks fell more than 2 percent on Sunday, outpacing losses on Wall Street on Friday.

The escalating conflict in the Middle East is likely to add to market turmoil as investors brace for a turbulent second half of the year. The bond market volatility index rose, while the VIX, Wall Street’s fear gauge, jumped to its highest level in nearly 18 months.

economic slowdown

Investors are concerned that the Federal Reserve’s decision to keep interest rates at their highest level in two decades could lead to a deeper economic slowdown. Traders expect the Fed to cut rates by more than a full percentage point in 2024, with the chance of a large 50 basis point cut in September increasing, according to data compiled by Bloomberg.

“With unemployment rising and core PCE inflation now below the Fed’s year-end projections, we believe the balance of risks is in favor of more aggressive Fed action,” said Brian Rose, senior U.S. economist at UBS Wealth Management. “We are changing our base case to a 50bp rate cut in September and 25bp in both November and December,” he wrote in a note to clients, after previously seeing only half that amount by year-end.

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Bond traders have repeatedly misjudged the direction of interest rates since the end of the pandemic, however, sometimes overshooting both directions and being caught off guard when the economy defied calls for a recession or inflation defied expectations. At the end of 2023, bond prices also rallied on the belief that the Federal Reserve was ready to start easing policy, only to give up those gains when the economy continued to show surprising strength.

Elsewhere in Asia, traders will be keeping a close eye on China’s economy after the government on Saturday set out its priorities for stimulating consumer spending as weak domestic demand continues to weigh on growth. Services and composite activity data from private sector firm Caixin are due later Monday after the manufacturing PMI unexpectedly contracted last week for the first time in nine months.

Main events this week:

• Bank of Japan to release June meeting minutes Monday
• China Caixin Services PMI, Monday
• Indonesia GDP, Monday
• Singapore Retail Sales, Monday
• Thailand Consumer Price Index, Monday
• Eurozone PPI, HCOB Services PMI, Monday
• US ISM Services Index, Monday
• Chicago Fed President Austin Goolsbee speaks Monday
• San Francisco Federal Reserve President Mary Daly speaks Monday
• Australia interest rate decision, Tuesday
• Japan Cash Earnings, Tuesday
• Consumer Price Index and Trade in the Philippines, Tuesday
• Eurozone Retail Sales, Tuesday
• US Trade Tuesday
• Unemployment in New Zealand, Wednesday
• China Trade Wednesday
• Chile Copper Exports, Trade, Wednesday
• US Consumer Credit, Wednesday
• Elizabeth McCall, a member of the European Central Bank’s Supervisory Board, speaks on Wednesday.
• Reserve Bank of Australia Governor Michelle Bullock speaks on Thursday
• Philippines GDP, Thursday
• India interest rate decision, Thursday
• US Initial Jobless Claims, Thursday
• Richmond Fed President Thomas Barkin speaks Thursday
• Chile Consumer Price Index, Thursday
• Colombia Consumer Price Index, Thursday
• Mexico CPI, Interest Rate Decision Thursday
• Peru interest rate decision, Thursday
• China CPI, Friday
• Germany CPI, Friday
• Unemployment in Canada Friday
• Brazil CPI, Friday

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Some key movements in the markets:

Stores

• S&P 500 futures were down 1.4% as of 9:19 a.m. in Tokyo.
• Hang Seng futures fell 0.4%.
• Japan’s Topix index fell 7.6%.
• Australia’s S&P/ASX 200 index fell 2.5%.
• Euro Stoxx 50 futures fell 2.8%.

Currencies

• The Bloomberg Dollar Index was little changed.
• The euro was little changed at $1.0916.
• The Japanese yen rose 0.9% to 145.24 yen per dollar.
• The offshore yuan rose 0.3% to 7.1431 against the dollar.
• The Australian dollar fell 0.4% to $0.6487.

Cryptocurrencies

• Bitcoin fell 2.1% to $57,902.01
• Ether price fell 2.6% to $2,679.89

Bonds

• The yield on the 10-year US Treasury note fell six basis points to 3.73%.
• The yield on the 10-year Japanese Treasury bond fell 14 basis points to 0.815%.
• The yield on the 10-year Australian bond fell four basis points to 4.05%.

Goods

• West Texas Intermediate crude rose 0.1% to $73.62 a barrel.
• Spot gold fell 0.9 percent to $2,422.41 an ounce.

This story was produced with the help of Bloomberg Automation.

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