European stocks and bonds fell in a volatile market yesterday, hit by growing concerns that global central banks’ commitment to the post-crisis orthodoxy of super-low interest rates and asset purchase programmes may be waning.
German Bund yields rose further above zero to as high as 0.06 per cent, their highest since Britain’s Brexit vote in late June, and the rise in lower-rated eurozone countries’ yields was even sharper.
Major European stock indexes fell as much as two per cent, putting them on course for their biggest losses since June, and Wall Street futures pointed to a fall of 0.7 per cent at the open .
Selling was driven by revived prospects of the US Federal Reserve hiking rates next week, and concerns that the European Central Bank and the Bank of Japan may be slowing their monetary policy easing efforts.
The fear of another “flash crash” such as happened last year – when 10-year Bunds rose from 0.16 per cent in late April to 0.77 per cent in just over two weeks, may also be preying on investors’ minds.
Earlier, Asian shares suffered their sharpest setback since June as investors were rattled by rising bond yields and talk that US rates might rise as early as next week.
Hong Kong’s benchmark stock index fell more than three per cent, its biggest one-day drop in seven months.
The sell-off there also followed reports that the Bank of Japan may look to steepen the Japanese yield curve at a policy review this month, with markets worried that, if it goes down that path, tapering buying of long-dated bonds may be among the options.
In the forex market, the risk aversion benefited perceived safe havens such as the yen while hitting carry trades in higher yielding currencies including the Australian dollar.
The Aussie has lost 2.25 per cent against the yen in two sessions to stand at 76.52, while the Japanese currency was firm on the US dollar at 102.06.
The euro fell marginally against the dollar to $1.1220 after weak German trade data dragged it down on Friday from a high of $1.1285. The dollar index, which tracks it against a basket of six currencies, was up marginally to 95.364.
Adding to Monday’s jittery mood, Democratic presidential candidate Hillary Clinton fell ill at a September 11 memorial ceremony and had been diagnosed with pneumonia.
Markets have generally assumed Mrs Clinton would win the presidency and have not truly considered the implications, both economic and for national security, should her rival Donald Trump prevail.
Oil prices extended Friday’s four per cent fall in Asia after reports showed increasing drilling activity in the United States, indicating that producers can operate profitably around current levels and bring on new supply.
Brent crude was off 82 cents at $47.18 a barrel, while US crude lost 85 cents to $45.03.