Bonds reign supreme, equities struggle on recession, Brexit fears

Aug 29 2019

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The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany on August 28, 2019. — Reuters
The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany on August 28, 2019. — Reuters

Global bond yields flirted with record lows while stocks inched down on Thursday, as global recession worries from intensifying United States-China frictions and the spectre of a no-deal Brexit drove investors to safer harbours.

MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.15 per cent, Singapore shares hit eight-month lows, while Japan's Nikkei shed 0.07pc.

On Wall Street, the S&P 500 gained 0.65pc on Wednesday due in part to gains in the energy sector following a rebound in oil prices. But US stock futures lost 0.2pc in Asia.

European shares are expected to slip again, with pan-European Euro Stoxx 50 futures down 0.21pc.

Bond markets around the world painted a gloomier picture, with yields on 30-year US Treasuries and 10-year German bunds yield both hitting record lows — 1.905pc and minus 0.716pc on Wednesday.

Inversion remains a prominent feature across the US yield curve, where long-dated yields are below short-dated ones — an unsettling sign as yield curve inversions have been a reliable leading indicator of future US recessions.

Italy's 10-year bond yield briefly fell below 1pc for the first time ever, in part prompted by growing hopes that a new government will soon be formed in Rome and a new election averted.

The 10-year Japanese government bond yield dipped 1 basis point to minus 0.285pc, just above its record low of minus 0.300pc touched in 2016.

“Falls in global bond yields reflect growing concerns that long-term global growth is slowing down on US-China tensions and worries over subsequent global supply chain disruptions,” said Tomoo Kinoshita, global market strategist at Invesco Asset Management in Tokyo.

“Stock markets on the other hand are supported in the near-term by hopes of more stimulus, notably from the Federal Reserve and the European Central Bank,” he said.

The two major central banks are expected to cut rates next month, while many investors believe the Bank of Japan could join the fray if market sentiment weakens further.

The Trump administration on Wednesday made official its extra 5pc tariff on $300 billion in Chinese imports and set collection dates of September 1 and December 15.

That means products such as smartwatches, Bluetooth headphones, flat panel televisions and many types of footwear will be levied from next month, raising worries about US consumption, one of the few remaining bright spots in the world economy.

The precious metal markets highlighted investors' quest to buy safer assets.

Gold rose 0.3pc to $1,543.7 per ounce, near six-year highs of $1,556.1 set earlier in the week while silver extended its bull run and rose 0.85pc to fetch $18.32 per ounce, edging near its 2017 peak.

Sharp falls in bond yields, however, have some investors worried that the recent rally in bond prices may have gone too far.

The 30-year US bond yield, now at 1.921pc, has fallen 60 basis points so far this month, slipping below the dividend yield of US shares, which stood just above 2pc.

“Yields may have fallen to unjustifiable levels even if one bets on a long-term stagnation in the global economy. And when we had a major bond correction in Europe four years ago, the adjustment was quite sharp,” said Yoshinori Shigemi, global market strategist at JPMorgan Asset Management in Tokyo.

Reflecting some nervousness, Merrill Lynch move index, a gauge of investors' expectations on how volatile US bonds will be, has risen back near three-year highs marked earlier this month.

In the currency market, the yen gained 0.2pc to 105.90 per dollar while the New Zealand dollar slipped 0.4pc to four-year lows on grim domestic business sentiment data.

The euro was steady at $1.1084.

The MSCI emerging market currency index is at its lowest levels since mid-November, having fallen 0.9pc so far this week and on course to mark its biggest monthly fall in more than seven years, driven by worries about a global slowdown.

The Brazilian real has fallen 8.5pc while the Mexican peso has lost 5.7pc so far this month.

The British pound licked its wounds at $1.2200, as the most serious UK political crisis in decades deepened after Prime Minister Boris Johnson decided to suspend Britain's parliament for more than a month before Brexit. The move will limit the time opponents have to derail a disorderly Brexit but also increases the chance that Johnson could face a vote of no-confidence in his government, and possibly an election.

“From an economic point of view, actively pursuing a no-deal Brexit through suspending parliament is tantamount to actively pursuing a recession,” said Seema Shah, Chief Strategist, Principal Global Investors in London.

Concerns about Brexit are already taking a toll on Europe, with the recent export slump in Germany driven mainly by weaker sales to Britain rather than the broader trade war.

Oil prices slipped a tad after a gain of nearly 2pc in the previous session.

Brent crude futures fell 0.53pc to $60.17 a barrel while US West Texas Intermediate (WTI) crude lost 0.36pc to $55.58 per barrel.