World shares climbed half a per cent yesterday, attempting to brush off fresh rises in global bond yields while equity futures also pointed to a firmer session on Wall Street which suffered its worst week in two years.
A higher Friday close for New York stocks following a week of “vol” induced selling, lifted markets in Asia and Europe, helping MSCI’s all-country index rise off four-month lows, while European shares firmed 1.4 per cent after touching six-month troughs last week.
Wall Street’s equity volatility gauge, the VIX – the spike in which had kicked off the ructions – was at 26.5 per cent, easing off Friday’s 29 per cent close.
While the index had rocketed to 50 at the height of last week’s turmoil, current levels are well above the long-term average around 11 per cent, in a sign that investors’ nerves are still jangling.
The continued move-up in bond yields is reinforcing the fear of more volatility ahead. Ten-year Treasury yields hit new four-year highs around 2.90 per cent, while German yields, the benchmark for Europe, hovered just below 0.8 per cent, the 2-1/2-year high touched last week.
“People are nervous after the shock of the past week but it doesn’t feel like there is a crisis around the corner. But never say never,” said Grant Lewis, head of research at Daiwa Capital Markets in London.
While equity markets attempt to recover, the question is whether they can withstand another sharp move up in bond yields – something will be put to the test by economic data this week.
On currency markets, traders had cut net short positions in the dollar last week, CFTC data showed, but speculators returned yesterday to short the dollar, pushing it 0.2 per cent lower versus a basket of currencies. Societe Generale said the risk bounce was being countered by the steeper US bond curve but the soft dollar showed the former currently had the upper hand.
The gap between short- and long-dated US yields is at the widest in more than three months – the so-called curve steepening which indicates higher inflation expectations and economic activity.
The euro rose around 0.2 per cent after losing 1.8 per cent last week, while the yen eased off five-month highs hit last week amid the flight to safe-havens.
Sterling, meanwhile, inched higher, off last week’s three-week lows but Britain’s shaky economy and rocky Brexit process kept it fragile.
Yesterday’s more cheerful market mood also lifted commodities, with Brent crude futures rising two per cent after last week’s 9 per cent fall, copper bouncing off two-month lows and gold up 0.2 per cent, well off five-week troughs.