US and European government bond yields dropped yesterday on indications of further monetary policy stimulus by the European Central Bank, while stocks fell, led by sectors most influenced by weak global demand trends.
The dollar had rallied against the euro after remarks by ECB head Mario Draghi, who warned that price inflation, a key measure of economic health, was lagging.
But the currency markets shifted after St Louis Fed President James Bullard, generally a more hawkish member of the US central bank, suggested industrial nations may be headed into an era of permanently low rates.
That drove buying in the US Treasury market, where yields have been steadily rising in anticipation of a Fed rate increase in December. Losses on Wall Street stocks revived safe-haven demand for government debt.
The dollar’s recent gains have helped push crude oil to lows not seen since late August and copper to a six-year low.
Oil was down again yesterday, with crude prices dropping more than two per cent. US crude fell $1.09 to $41.84 a barrel, and Brent crude slipped $1.31 to $44.51 a barrel.
Weak global demand has sapped interest in commodity markets.
The US stock market also fell, dragged by energy and materials shares which were directly affected by global demand.
The MSCI all-country world index lost 0.66 per cent, with the heaviest losses in European shares.
The pan-European FTSEuroFirst 300 closed down 1.61 per cent at 1,470.05 points.
The Dow Jones industrial average fell 163.45 points, or 0.92 per cent, to 17,538.77. The S&P 500 dropped 14.6 points, or 0.7 per cent, to 2,060.4 and the Nasdaq Composite lost 19.63 points, or 0.39 per cent, to 5,047.39.
Copper futures in London hit a 6-year low of $4,800 a tonne and platinum hit its lowest since late 2008 at $868.75 an ounce.
In an address to the European Parliament, Draghi said inflation dynamics had somewhat weakened and a “sustained normalisation” of inflation could take longer to achieve than thought.
“Although the debate at the ECB seems to be far from over, the fact that Draghi made these comments in a high-profile setting suggests that he is confident that the majority of the ECB council will support him,” said Holger Schmieding, chief economist at Berenberg Bank in London.
German 10-year yields rose two basis points to 0.607 per cent.
All other eurozone yields were down on the day.
Expectations for ECB easing are in sharp contrast to those for US monetary policy. Most investors are betting that last Friday’s stellar US employment report has set the seal on the Federal Reserve raising rates at its meeting next month.
Illustrating that divergence, the gap between US and German five-year yields rose to 181 basis points at one point, the highest since 1999.
The dollar index, which tracks the greenback against a basket of six major currencies, fell 0.23 per cent to 98.784.
The euro rose 0.22 per cent to 1.0743, while the yen fell 0.02 per cent to 122.82.