Longer-dated government bonds rallied and most major US and European equity markets fell as slowing growth in China and the rapid spread of the Delta variant of coronavirus fuelled concerns about the outlook for the global economy.
The yield on the 30-year US Treasury bond, which moves inversely to its price, fell 0.05 percentage points to 1.943 per cent as traders avoided near-term risk and moved money into the haven asset. The 10-year Treasury yield fell 0.04 percentage points to 1.329 per cent.
In equity markets, the Stoxx Europe 600 fell 0.9 per cent, London’s FTSE 100 dropped 0.8 per cent and Germany’s Xetra Dax lost 1.1 per cent.
The S&P 500 index lost 0.2 per cent and the Nasdaq Composite traded flat, with both Wall Street markets outperforming Europe as stay-at-home technology stocks gained. Shares in Netflix added 1.3 per cent and Zoom Video Communications rose 1.9 per cent.
China’s gross domestic product rose 7.9 per cent in the second quarter compared with the same period last year, following an 18.3 per cent gain in the first quarter. Analysts are forecasting a further slowdown as an export boom driven by demand for technology products and other durable goods in the early stages of the pandemic fades and the government clamps down on property speculation.
European and US equities remain near all-time highs, buoyed by expectations of a surge in quarterly earnings after companies benefited from major industries reopening after last year’s pandemic-related lockdowns and restrictions.
“That will probably be the peak of earnings growth in Europe and the US for the pandemic-era business cycle,” said Grace Peters, head of market strategy for Europe at JPMorgan Private Bank. “At the same time, the Delta [Covid-19] variant has introduced new complexities . . . the longer the virus lingers, the higher the risk of longer-term damage to the global economy.”
UK manufacturers have reported that rising Delta variant cases are hitting production while economists suspect rising infections in Europe risk derailing the eurozone’s recovery.
Longer-dated bonds also found buyers after Federal Reserve chair Jay Powell told lawmakers that a jump in the US consumer price index to an annual rate of 5.4 per cent in June did not mean high inflation would persist.
While inflation erodes the value of longer term bonds’ fixed interest payments over time, the prospect of price rises moderating has driven investors back into Treasuries after many cut exposure to this asset class earlier this year.
“If you agree with the Fed that high inflation will be transitory that is a reason to buy at the long end [of the bond yield curve],” said Brandywine Global fixed income portfolio manager Jack McIntyre.
In European fixed income, Germany’s 30-year Bund yield dropped 0.04 percentage points to 0.147 per cent. UK gilts were under pressure from expectations of higher interest rates and inflation. The 10-year gilt yield rose 0.3 per cent to 0.654 per cent.
Sterling was steady against the dollar at $1.3849 while the euro lost 0.2 per cent to $1.1812.
Brent crude, the international oil marker, was down 1 per cent to $73.98 a barrel as traders digested news of a potential agreement between Opec kingpin Saudi Arabia and the UAE to raise production, as well as concern over the spread of the Delta coronavirus variant.