(Bloomberg) – A rapid weakening in financial markets on Monday underscored how even the most positive news for the world economy is not a filler to venture the assets hampered by the anchor of the global bond market.
It’s their sensitivity to rising treasury yields, the approval of a US $ 1.9 billion stimulus package over the weekend and data showing an increase in China’s exports lowered equities and futures. Other risk-sensitive assets of the Korean won to Indonesian bonds retreated, and technology stocks underperformed as the 10-year treasury yield fell back to 1.60%.
“Profit taking is not over yet, as returns are still rising and investors have become cautious,” said Jackson Wong, asset manager at Amber Hill Capital, which is based in Hong Kong. “The 10-year return at around 1.6% is not good for value assets, and there is no prospect that the return increase will stop in the short term.”
The improvement in data and the looming course of the second largest stimulus program in U.S. history have turned optimism about a recovery into fears of an overheating economy causing faster-than-expected rate hikes. The measures that policymakers are pushing to combat the pandemic are now pushing volatility in the securities and stock markets and stimulating a rethinking of expanded valuations in assets around the world.
“The short-term risk is that our ten-year returns will continue to rise to 2%,” said Khoon Goh, head of research in Asia at Australia & New Zealand Banking Group in Singapore. “This will result in a further adjustment in asset prices that has previously benefited from low returns.”
Man Group Plc has warned that emerging market debt is a turning point as US yields rise, while BlackRock Inc. said there was no immediate end to the sale of bonds that showed comparisons with the 2013 tapered tantrum.
For Sue Trinh, Managing Director of Global Macro Strategy at Manulife Investment Management, credit is the most important market to watch now, which has remained relatively unshaken amid broad financial conditions that remain easy.
Some of the key movements in the markets on Monday:
The MSCI Asia Pacific Index lost 0.7% and fell for a third live session. Korea’s victory has fallen to its worst since November. The Bloomberg Dollar Spot Index reversed losses to trade 0.1% higher, extending 0.9% progress last week
While the U.S. stimulus package is due to return to the House on Tuesday for a final vote expected, economists are already raising their forecasts for growth. And while a rise in treasury yields is often seen as a sign of economic strength, the pace of movement has raised concerns about a disorderly spiral in bond prices.
“Momentum is strong in selling the bonds,” Manulife’s Trinh said. “We are now in Fed eclipse for next week and the risk is that momentum will take on a life of its own.”
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