Shares grind higher; bonds brandish recession warnings
LONDON (March 29) - Global markets veered in different directions on Tuesday, with shares climbing to five-week highs, recession warnings growing in the government bond markets and Japan’s yen headed for its worst month since 2016.
Europe's main bourses made strong opening gains, taking cues from Asia overnight after the Bank of Japan had defended its vast stimulus programme, and as warring Russia and Ukraine held their first face-to-face talks in more than two weeks in Turkey. read more
It was enough for traders to shrug off data showing bigger-than-expected drops in French and German consumer confidence due to both war worries and the fastest rising European inflation in decades. read more
Germany's benchmark 10-year Bund yield - the main gauge of European borrowing costs - hit its highest since May 2018, adding to the seismic shifts global rates markets have experienced this year due to the sharp rise in global prices.
Two-year U.S. yields have now risen an eyewatering 165 basis points this quarter. More than 200 basis points of U.S. interest rate rises are also now priced in for 2022 which, if realised, would be the most in a calendar year since 1994.
The difference between two and 10-year Treasury yields seems well on the way to turning negative for the first time since 2019 as well, narrowing below 6 bps on Tuesday.
This is the so-called curve inversion that is considered a reliable predictor of recession, although the U.S. Federal Reserve has urged investors to also watch other curve segments which are still steep, giving it room to tighten policy further and faster.
"We have seen something that is a little unprecedented because the Fed is suddenly facing a question about its credibility and whether it can effectively reduce inflation," Amundi's Head of Multi-Asset strategies, Francesco Sandrini, said.
He added Amundi had revised down its European growth forecast to 1.5% for the year from 2% previously, but it could be lower if the situation continues to deteriorate.
"We question a lot our forecasts," Sandrini said, especially as Europe's big companies are more heavily exposed to commodity price pressures than U.S. counterparts. "It is extremely complicated, we need to proceed cautiously."
REUTERS
