Stocks and commodities steamed higher yesterday, suddenly shrugging off the angst that has burst out in recent weeks over higher global borrowing costs on the back of rising inflation.
Economists were struggling to explain the shift except for the argument that historically it’s not unusual for stocks and bond market borrowing costs to rise in tandem with a rapidly expanding economy.
Some just blamed the weather and time of year. They speculated that Wednesday’s strong US inflation data that many had predicted could reignite the rout was probably distorted while Asian bears may be squaring up positions for Chinese new year.
Whatever the reason though, the animal spirits were back for riskier assets like stocks.
Big gains for Wall Street and Asia overnight put MSCI’s 47-country world stocks index back in positive territory for the year and Europe’s main markets followed with 0.6 to one per cent gains.
Wall Street futures were also pointing higher but just as big a puzzle as the sudden rebound in stocks sentiment was the break down in correlation between rising US bond yields and dollar.
US Treasury yields on benchmark 10-year notes hit a fresh four-year high of 2.94 per cent which also dragged gap to 0.786 per cent German Bunds out to its widest in 10 months.
The dollar tumbled across the board, including to a 15-month low against the yen of 106.18 yen as worries about the US government’s finances seemed to set again after a White House-led spending splurge. That also marked a drop of 3.8 per cent from its early February peak near 110.50 yen, while the euro and pound both climbed back above the $1.25 and $1.40 thresholds.
Asia’s stocks rally overnight saw Australian shares climb 1.15 per cent and South Korea’s KOSPI added 1.1 per cent.
Volatility shrivelled back too. The VIX index – Wall Street’s “fear gauge” and a measure of market volatility – fell all the way back to 18, less than half the 50-point peak touched last week.
The dollar’s weakness also lifted emerging markets and commodities though there were a number of idiosyncratic stories in play too.
Brent crude futures shot up over one per cent meanwhile to $65.06 per barrel before losing momentum and trudging back to $63.87.
While the greenback’s woes were a big factor, the moves came after a surge the previous day triggered by supply data and comments from Saudi Arabia that major oil producers would prefer tighter markets than end supply cuts too early.
Metals copper and gold both shone too.
Gold rose to a 10-day top of $1,357 per ounce, while copper – seen as a sensitive indicator of the health of the global economy – was on track for a weekly gain of more than 6 per cent.