Global Markets React to Economic Uncertainties: Shares Drop, Bond Yields Rise
Global financial markets experienced heightened volatility as a complex web of factors converged, driving shares to a two-month low and pushing government bond yields to near 16-year highs. Investors remained cautious, anticipating prolonged high-interest rates amid concerns about China's shadow banking sector. The tumultuous landscape saw the US dollar clinching its fifth consecutive week of gains, driven by expectations of sustained borrowing costs. Remarkably, this streak was the longest the dollar had achieved in 15 months. This ascent came on the back of assumptions that the US economy would avoid a severe downturn, thus maintaining healthy corporate earnings.
However, the bull run for crude oil came to a halt as market sentiment faltered due to China's decelerating economic growth and the looming prospect of further US rate hikes. A seven-week winning streak was snapped as these macroeconomic factors sent ripples through the oil market.
The gloomy sentiment extended its grip on the cryptocurrency realm as well, with Bitcoin plummeting to a fresh two-month low, reflecting the pervasive cautiousness among investors.
Jason Da Silva, Director of Global Investment Strategy at Arbuthnot Latham, elucidated the situation, indicating that stock markets were inevitably impacted by the soaring bond yields. These yields were propelled by robust economic data from the US, which continued to surpass expectations even in the face of previous rate hikes. The MSCI All Country stock index slumped by 0.3%, hitting a low unseen since early June. This August, it had already fallen by a significant 5.85%, despite holding onto a yearly gain of 10.2%.
Ten-year US Treasury yields saw an adjustment, easing by 7 basis points to reach 4.2329%. This minor decline came after a remarkable surge of about 30 basis points earlier in the month. It was a climb that propelled the yields to a 10-month pinnacle of 4.3280%, almost reaching levels last observed in 2007.
Europe was not immune to this economic uncertainty either, as Eurozone government bond yields underwent a minor relaxation due to investors seeking refuge in safe-haven government bonds. This phenomenon was also evident in the UK, with its 10-year bond yield having risen to the highest level since 2008, reaching approximately 4.76%.
Da Silva noted the message conveyed by these bond yields: a necessity to maintain higher interest rates for an extended duration. The potential for even stronger economic growth could result in further tightening measures, much to the market's displeasure.
The Federal Reserve's recent minutes painted a similar picture, indicating that the committee saw substantial risks of inflation escalation, hinting at more rate hikes in the pipeline.
The upcoming annual meeting of the world's top central banks in Jackson Hole, Wyoming, promised to add more insight into this evolving landscape. All eyes were on Federal Reserve Chair Jerome Powell's speech for clues regarding potential rate hikes.
Amid these fluctuations, a liquidity crunch in China's shadow banking sector had investors on edge. As major asset manager Zhongzhi disclosed the need for debt restructuring, concerns about the sector's stability mounted.
In Asia, the MSCI broadest index of Asia-Pacific shares, excluding Japan, experienced a 0.9% drop, teetering on the edge of a nine-month low. A weekly loss of over 3% marked the third consecutive week of declines.
China's stocks faced a similar fate, with blue-chip stocks sliding by 1.2%, and Hong Kong's Hang Seng Index plummeting by 2%, setting the stage for its most substantial weekly losses in two months. Technology shares bore the brunt of these declines, likely triggered by reports of scrutiny over electric-vehicle batteries and car parts due to concerns over forced labour in Chinese supply chains.
Adding to the turmoil, Chinese property developers listed in Hong Kong also suffered, following China Evergrande's filing for bankruptcy protection in a US court.
Meanwhile, Japan's Nikkei lost 0.5%, signalling a potential 3.1% drop for the week. Japan's core inflation slowed in July, further indicating that the Bank of Japan was in no rush to phase out monetary easing.
The US dollar, after a brief dip, regained its strength, holding near a two-month peak against major currencies. At 103.42, it had gained approximately 0.5% over the week. The Japanese yen traded at 145.34 against the dollar, down from its previous nine-month low but still prompting memories of Japanese authorities' intervention last year.
Amidst the turmoil, oil prices saw a marginal dip. Brent crude futures rose by 0.15% to reach $84.25 per barrel, while US West Texas Intermediate crude futures inched up by 0.3% to $80.62.
In the midst of this economic turbulence, the price of gold experienced a 0.2% increase, climbing to $1,892 per ounce.
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