Bond yields, euro rise; yuan slumps

Bond yields have resumed their rise as investors bet on aggressive global interest rate hikes, while the euro climbed after a heated TV debate saw French President Emmanuel Macron bolster his weekend re-election hopes.

MSCI’s main world stock market index barely mustered a move amid the prospect of higher global borrowing costs, but Paris stocks scored a 1.1 per cent jump after Wednesday evening’s clash between Macron and his far-right rival Marine Le Pen.

Although Le Pen came across as more polished and composed than in a TV duel that scuppered her hopes for the presidency in 2017, Macron needled her over her ties to Russia’s leadership, her plans for the economy and her policy for the European Union.

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Investors were otherwise back to focusing on the war in Ukraine and how fast interest rates will have to rise around the world as the conflict with Russia adds to what were already intense global inflationary pressures.

Most 10-year bond yields across Europe rose sharply again, with Germany’s benchmark Bund yields heading back towards a seven-year peak and Italy’s hitting their highest since March 2020’s initial COVID panic.

Markets are expecting at least another half-percentage-point rate hike from the US Federal Reserve next month while one European Central Bank policymaker had said on Wednesday it might start hiking euro zone rates as early as July.

Citi’s Global Markets Strategist Matt King said the pressure for markets was also coming from quantitative tightening, or QT – the process of years of frantic central bank money-printing going into reverse.

“Don’t look at the real yields, look at the liquidity flow,” King said, adding a rough calculation was that $US1 trillion of QT would knock global stocks down by around 10 per cent.

“These flows are just too big for markets to anticipate ahead of time,” he said.

Asia markets saw Chinese and Hong Kong stocks hit month lows overnight and China’s yuan also fell to its lowest in six months as Shanghai authorities said tough COVID-19 restrictions would remain in place.

Chinese blue chips shed 1.8 per cent while Hong Kong stocks fell two per cent, both falling to their lowest level since mid-March.

The spot yuan touched 6.4478 per US dollar, its softest level since October.

The declines pulled MSCI’s broadest index of Asia-Pacific shares outside Japan 0.6 per cent lower, despite gains in Korea and Australia, where the local benchmark rose 0.4 per cent to not far off a record peak.

Japan’s Nikkei also jumped 1.2 per cent as the yen hovered near its recent 20-year low.

A prolonged slowdown in China would have substantial global spillovers, International Monetary Fund Managing Director Kristalina Georgieva said on Thursday, adding Beijing has room to adjust policy to provide support.

Deutsche Bank’s chief economist David Folkerts-Landau meanwhile warned a late-2023 US recession was now a baseline scenario.

“Prepare for a hard landing,” he said, flagging the possibility of a Fed funds rate in the 4.5-5 per cent range and euro zone rates at 2-2.5 per cent.

Deutsche Bank also noted the extent of Fed hikes priced in by December had hit a fresh high of 227 bps. When added to the 25 bp hike from last month, that implies the Fed will tighten by more than 260 bps for the year as a whole – more than the 250 bps seen back in 1994.

Treasury 10-year yields had dived 11 basis points on Wednesday, but were back up to 2.874 per cent in Europe.

Nasdaq futures were also up more than half a per cent as upbeat Tesla earnings helped ease the stress of Netflix’s brutal slump this week.

The streaming company’s losses now stand at 62 per cent this year, making it the worst performer in the entire S&P 500 on a year-to-date basis.

In the currency markets, the euro rose 0.6 per cent to above $1.09 again and also chalked up gains versus the Japanese yen, Swiss franc and Norwegian crown.

“The euro is all about ECB drumbeat for a July hike,” said Kenneth Broux, an FX strategist at Societe Generale in London.

Oil meanwhile firmed in choppy commodity trading as concerns about supply due to a potential European Union ban on Russian oil came to the fore. Russian forces stepped up their attacks in eastern Ukraine on Thursday.

Brent crude futures rose 1.54 per cent to $US108.44 a barrel, although European natural gas prices fell 1.2 per cent 96.5 euros.

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