Global stocks rally as bond markets stabilise after sell-off

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Global stocks bounced back and bond prices steadied after last week’s turbulent trading, triggered by worries over inflationary pressures and the possibility of central banks tightening monetary policies.

Wall Street’s blue-chip S&P 500 index gained 1.5 per cent at the opening bell on Monday, rebounding from a weekly fall of 2.5 per cent, while the technology-focused Nasdaq Composite rose 1.6 per cent.

In Europe, the region-wide Stoxx 600 was up 1.4 per cent in afternoon trading. London’s FTSE 100 benchmark gained 1.3 per cent, Frankfurt’s Xetra Dax added 1 per cent and CAC 40 in Paris was up 1.4 per cent.

The gains for global equities followed a rebound in the price of US government debt at the end of last week. The yield on the 10-year US Treasury ticked up around 0.03 percentage points on Monday to 1.43 per cent but remained well below the 12-month high of 1.6140 per cent reached last week.

“It’s all about bonds,” said Willem Sels, chief investment officer at HSBC’s private bank, who said expectations for a continuation of “ample” stimulus measures from global central banks provided a “powerful” boost for risk assets.

That thesis came into play on Monday when Australia’s central bank said it would purchase A$4bn ($3bn) in long-term bonds, double the usual amount, as it attempts to ease a heavy sell-off that has hit its markets. The RBA had sharply increased its purchases of short-term bonds last week as its sovereign debt endured successive waves of intense selling.

The Australian 10-year yield tumbled almost 0.25 percentage points on Monday to 1.63 per cent, marking the biggest rally since a period of turbulent trading in global financial markets in March last year. It had surged as high as 1.973 per cent last Friday.

Elsewhere in the region, Japan’s Topix index closed up 2 per cent, while Australia’s benchmark S&P/ASX 200 climbed 1.7 per cent. China’s CSI 300 index of Shanghai and Shenzhen-listed stocks ended the session 1.5 per cent higher and Hong Kong’s Hang Seng added 1.6 per cent.

Volatility in global debt and equity markets has been stoked by widening concerns that a broad economic recovery from the pandemic could spur inflation, prompting central banks to withdraw unprecedented monetary policy support.

“Global real yields could rise further,” said Robert Buckland, chief global equity strategist at Citigroup. “This is bad for equity markets, especially those tilted towards highly rated growth stocks.”

He said this was particularly so in the US, where the valuations of big tech companies had been buoyed by low rates.

While low rates increase the current value of tech groups’ future cash flows, the present value of future earnings falls if rates rise.

Inflation expectations were heightened at the weekend when the US House of Representatives passed President Joe Biden’s $1.9tn coronavirus stimulus package, months after earlier support measures expired.

“Last week was an excellent reminder of a very important lesson — the bond market matters,” said Gregory Perdon, co-chief investment officer at Arbuthnot Latham. “But if stimulus cheques get into the hands of Americans fast enough, maybe we will be able to kick the can a little bit further down the road.”

Inflation expectations also fed through to commodities markets, with Brent crude, the international benchmark, adding 0.6 per cent to $64.83 a barrel.

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