Stocks slump as inflation fears overtake economic recovery hopes

Asian stocks fell by the most in nine months on Friday as a rout in global bond markets sent bond yields flying and spooked investors amid fears the heavy losses suffered could trigger distressed selling in other assets.

In a sign that the gloomy mood will reverberate across markets, European and United States stock futures were a sea of red. Eurostoxx 50 futures lost 1.7 percent while futures for Germany’s DAX and those for London’s FTSE dropped 1.3 percent each.

MSCI’s broadest index of Asia-Pacific shares outside Japan slid more than 3 percent to a one-month low, its steepest one-day percentage loss since May 2020.

For the week, the index is down more than 5 percent, its worst weekly showing since March last year when the coronavirus pandemic had sparked fears of a global recession.

Friday’s carnage was triggered by a plunge in bonds.

The scale of the sell-off prompted Australia’s central bank to launch a surprise bond-buying operation to try and staunch the bleeding.

The yields on the 10-year US Treasury note eased back to 1.538 percent from a one-year high of 1.614 percent, but were still up a startling 40 basis points for the month in the biggest move since 2016. Bond yields rise as their prices fall when investors sell them.

“Bond yields could still go higher in the short term though as bond selling begets more bond selling,” said Shane Oliver, head of investment strategy at Australian investment firm AMP.

“The longer this continues the greater the risk of a more severe correction in share markets if earnings upgrades struggle to keep up with the rise in bond yields.”

Taper tantrum 2.0?

Markets were hedging the risk of an earlier rate hike from the Federal Reserve, even though officials this week promised that any such move was long in the future.

Bets on what the Federal Reserve’s key interest rate will be by a certain date – known as Fed funds futures – suggest that investors are almost certain the US central bank will raise the rate by January 2023.

Even the thought of an eventual end to super-cheap money sent shivers through global stock markets, which have been regularly hitting record highs and stretching valuations. The Federal Reserve’s announcement in 2013 that it would start to reduce some of its monetary stimulus measures led to a surge in bond yields and a drop in share prices, something investors called a “taper tantrum”.

“The fixed income rout is shifting into a more lethal phase for risky assets,” says Damien McColough, Westpac’s head of rates strategy.

“The rise in yields has long been mostly seen as a story of improving growth expectations, if anything padding risky assets, but the overnight move notably included a steep lift in real rates and a bringing forward of Fed lift-off expectations.”

Japan’s Nikkei shed 3.7 percent and Chinese blue chips joined the retreat with a drop of 2.5 percent.

Emerging strains

Overnight on Wall Street, the Dow Jones industrial average fell 1.75 percent, while the S&P 500 lost 2.45 percent and the Nasdaq slumped 3.52 percent, the biggest decline in almost four months for the tech-heavy index.

Technology stocks that have surged over the last 12 months all suffered, with Apple Inc, Tesla Inc, Amazon.com Inc, NVIDIA Corp and Microsoft Corp the biggest drags.

All of that elevated the importance of US personal consumption data due later on Friday, which includes one of the Federal Reserve’s favoured inflation measures.

Investors are expecting core inflation – which excludes the prices of food and energy which tend to be volatile – to dip to 1.4 percent in January, which could help calm market angst. But any surprise increase, or even a smaller-than-expected fall, could accelerate the bond rout.

The surge in US Treasury yields also caused ructions in emerging markets, which feared the better returns on offer in the relatively safe US might attract funds away.

The Brazilian real, Turkish lira and South African rand were all weaker against the US dollar.

The flows helped nudge the US dollar up more broadly, with the dollar index – which measures the greenback against a basket of the world’s top currencies – rising to 90.371. It also gained on the low-yielding Japanese yen, briefly reaching the highest since September at 106.42. The euro eased slightly to $1.2152.

The jump in yields has tarnished gold, which offers no fixed return, and dragged it down to $1,760.8 an ounce from the week’s high about $1,815.

However, analysts at ANZ Bank were more bullish on the outlook.

“We now expect US inflation to hit 2.5 percent this year,” they said in a note. “Combined with further depreciation in the US dollar, we see gold’s fair value at $2,000 an ounce in the second half of the year.”

Oil prices dropped on the dollar’s strength and expectations of more supply.

US crude fell 67 cents to $62.86 per barrel and Brent also lost 67 cents to $66.21.