World equity markets, the dollar, bond prices and commodities slumped yesterday in a full-scale retreat by investors unnerved by fears that major central banks are cooling in their commitment to the money-pumping that has buoyed markets.
Central banks have pushed many assets beyond the fundamentals and created a great deal of volatility
The decline was initially triggered in Tokyo when the Bank of Japan elected not to take any fresh measures to tackle rising government bond yields that threaten to thwart its $1.4 trillion stimulus programme.
That action sparked a further reversal of bets on the dollar, stocks, emerging-market debt and other assets bolstered by accommodative monetary policies.
The prospect of reduced stimulus has halted a rally that took US indexes to all-time highs and the MSCI All-Country World Index to a five-year peak. The MSCI index was down 0.8 per cent, reversing some of the day’s losses.
“Central banks have pushed many assets beyond the fundamentals and created a great deal of volatility,” said Michael O’Rourke, chief market strategist at Jones Trading. “Nobody really has an idea where the un-winding stops.”
The dollar dropped as much as two per cent against the yen to fall to 96.76 yen, and the euro also lost nearly two per cent against the yen to fall to 128.39. The selling spread across emerging shares as well, sending MSCI’s benchmark index to a nine-month low and extending losses caused by political tensions in Turkey and worries about China’s slowing economy.
The decline was led by a sharp fall in the dollar which followed the BOJ’s decision to refrain from taking additional measures to curb recent bond market volatility at its regular monthly policy meeting.
BOJ Governor Haruhiko Kuroda did subsequently try to reassure the markets the central bank would consider fresh steps if yields spike again in the future, but the decision rattled many foreign investors.
Debt investors pulled out of some of the riskiest assets in the euro area. Greek 10-year bond yields suffering their worst daily loss over a year, jumped a full point to stand at 10.66 per cent, and Spain’s 10-year bond rose to 4.72 per cent from 4.6 per cent.
The selling in riskier markets did not provide any succour for safe-haven government debt, however. US Treasury yields touched their highest levels in 14 months, with the benchmark 10-year note rising to 2.26 per cent. The yield on safe-haven German 10-year bonds rose seven basis points to 1.62 per cent.
The Dow Jones industrial average was down 119.34 points, or 0.78 per cent, at 15,119.25. The Standard & Poor’s 500 Index was down 14.84 points, or 0.90 per cent, at 1,627.97. The Nasdaq Composite Index was down 34.05 points, or 0.98 per cent, at 3,439.72.
Brent crude dropped $1.52 to $102.42 a barrel, while copper fell to a one-month low at $7,065 a tonne.
Gold was down one per cent, close to a three-week low at $1,371.31 an ounce.
Japan’s Nikkei index closed down 1.5 per cent, though this followed Monday’s 4.9 per cent gain, while MSCI’s broadest index of Asia-Pacific shares outside Japan tumbled 1.1 per cent to hit 6-1/2-month lows.
Traders also noted nervousness about a German Constitutional Court hearing on the legality of the European Central Bank’s bond-buying scheme, which added to long-running fears over the US Federal Reserve winding down its stimulus.
The broad FTSEurofirst 300 index was down 1.5 per cent to hit a six-week low.