Global stock rally deepens, fueling bond market rally: Markets Wrap

(Bloomberg) — A global stock selloff deepened Monday as concerns mounted that the Federal Reserve is lagging in providing policy support for a slowing U.S. economy, sending investors into the safety of bonds. Japanese shares fell as traders priced in more domestic rate hikes.

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The Topix and Nikkei indexes were on the verge of a bear market, with the former facing a three-day decline that would be its worst since the Fukushima nuclear meltdown in 2011. The yen rose more than 2% against the dollar, a gauge of regional stocks falling by the most in more than four years and set to erase 2024 gains. U.S. index futures also fell.

Data on Friday showed U.S. nonfarm payrolls posted one of the weakest readings since the pandemic and the unemployment rate unexpectedly climbed above the Fed’s year-end forecast, triggering a closely watched recession indicator. Concerns about the health of the U.S. economy sent Treasury yields lower, while spreads on investment-grade dollar bonds in Asia were expected to widen by the most in 22 months.

“It’s quite a dramatic shift in the narrative, showing how much of the recent trends have been underpinned by expectations of a US soft landing,” said Charu Chanana, head of FX strategy at Saxo Bank A/S. “The more the assumption of a US soft landing is questioned, the further we could see a pullback in equities and strategies funded by the low-yielding currencies, where positioning has been massively skewed.”

Japan’s benchmark 10-year bond yield fell to its lowest level since April, falling as much as 17 basis points to 0.785% on Monday. Shares of Mitsubishi UFJ Financial Group Inc. posted their biggest intraday drop ever as the fall in bond yields threatened to erode lending margins.

Bond traders have repeatedly misjudged where interest rates were headed since the pandemic ended, sometimes in both directions. Global bonds have erased losses for the year as signs of economic slowdown in the U.S. fueled demand for fixed income.

The global stock declines reflect concerns about the economic outlook, geopolitical risks and questions about whether heavy investment in artificial intelligence lives up to the hype around the technology. Economists at Goldman Sachs Group Inc. raised the probability of a U.S. recession in the coming year to 25% from 15%, though they added that there are reasons not to fear a slump.

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Sentiment was also negatively affected by news that Berkshire Hathaway Inc. had cut its stake in Apple Inc. by nearly 50% as part of a massive sell-off in the second quarter.

Asian currencies rose, led by the Malaysian ringgit, while the Mexican peso’s decline extended as traders continued to unwind their emerging-market carry trades. The sudden appreciation of funding currencies such as the yen and Chinese yuan hurt the carry trade, where traders typically borrow at lower rates to invest in higher-yielding assets.

Elsewhere, oil prices hovered near a seven-month low as a selloff in broader financial markets played off rising tensions in the Middle East. Israel is bracing for a possible attack from Iran and regional militias in retaliation for the killings of Hezbollah and Hamas officials. Cryptocurrencies also reeled as risk aversion swept global markets on Monday.

Fed Cuts

With only three Fed meetings left, swap pricing reflects the growing perception that the central bank will need to make an unusually large half-point move at one of its meetings or intervene between scheduled meetings to stimulate growth.

Still, major policy changes with an aggressive response could signal an emergency situation, further unsettling traders. Goldman Sachs, for example, has raised the probability of a recession in the coming year from 15% to 25%.

“From the Fed’s perspective, this doesn’t mean making hasty policy decisions, but it should help them take off the rose-tinted glasses when assessing policy decisions at the next meeting,” said Charlie Ripley of Allianz Investment Management.

Stocks are likely to fall when the Fed makes its first rate cut, according to Michael Hartnett of Bank of America Corp., because the move comes as data points to a hard, rather than soft, landing for the U.S. economy.

In the history of Fed easing starts since 1970, cuts in response to a downturn have been negative for stocks and positive for bonds, the BofA strategist wrote in a note, citing seven examples that demonstrate this pattern. “A very important difference in 2024 is the extreme extent to which risk assets are ahead of the Fed cuts,” Hartnett said.

Important events this week:

• Eurozone PPI, HCOB Services PMI, Monday

• US ISM Services Index, Monday

• Chicago Fed President Austan Goolsbee speaks Monday

• Mary Daly, president of the Federal Reserve Bank of San Francisco, speaks Monday

• Australia interest rate decision, Tuesday

• Japanese Cash Earnings, Tuesday

• Philippine CPI, Trade, Tuesday

• Eurozone retail sales, Tuesday

• US trading, Tuesday

• New Zealand unemployment, Wednesday

• Trade with China, Wednesday

• Copper Export and Trade from Chile, Wednesday

• US Consumer Credit, Wednesday

• ECB supervisor Elizabeth McCaul to speak on Wednesday

• RBA Governor Michele Bullock speaks, Thursday

• Philippines GDP, Thursday

• India rate decision, Thursday

• First US jobless claims, Thursday

• Richmond Fed President Thomas Barkin speaks Thursday

• Chile CPI, Thursday

• Colombian CPI, Thursday

• Mexican CPI, interest rate decision Thursday

• Peru interest rate decision, Thursday

• China PPI, CPI, Friday

• German CPI, Friday

• Canada Unemployment, Friday

• Brazil CPI, Friday

Some of the major moves in the markets:

Shares

• S&P 500 futures were down 1.7% at 1:59 p.m. Tokyo time

• Nikkei 225 futures (OSE) fell 8.9%

• Japan’s Topix fell 9.5%

• Australia’s S&P/ASX 200 fell 3.4%

• Hong Kong’s Hang Seng fell 0.2%

• The Shanghai Composite changed little

• Euro Stoxx 50 futures fell 0.9%

Currencies

• The Bloomberg Dollar Spot Index fell 0.1%

• The euro rose 0.2% to $1.0932

• The Japanese yen rose 2.2% to 143.36 per dollar

• The offshore yuan rose 0.5% to 7.1251 per dollar

• The Australian dollar fell 0.3% to $0.6492

Cryptocurrency

• Bitcoin fell 9.4% to $53,551.63

• Ether fell 15% to $2,337.93

Bonds

• The yield on 10-year government bonds fell four basis points to 3.75%

• Japan’s 10-year yield fell 15 basis points to 0.805%

• The Australian 10-year yield fell four basis points to 4.05%

Raw materials

• West Texas Intermediate crude oil fell 0.3% to $73.27 a barrel

• Spot gold rose 0.4% to $2,452.46 an ounce

This story was produced with the help of Bloomberg Automation.

–With assistance from Winnie Hsu, Kana Nishizawa, and John Cheng.

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