HONG KONG – Equity markets suffered another sell-off today on fears that an expected strong global economic recovery this year will fan inflation and force central banks to hike interest rates, despite reassurances that ultra-loose monetary policies will be kept in place for as long as needed.
The roll-out of Covid-19 vaccines, slowing of infections and President Joe Biden’s impending huge United States stimulus are proving to be a double-edged sword for traders, as they weigh the much-needed return to pre-pandemic life with the prospect that prices will soar.
And, there is a worry this will threaten one of the key pillars of the rally on world markets from their March nadir – record-low borrowing costs and a vast bond-buying programme.
Alarm bells have been ringing for weeks as the yield on benchmark 10-year US Treasuries climbed to one-year highs as investors moved out of the safe havens – yields rise as prices fall – and yesterday, a better-than-expected read on US jobless claims pushed them up further.
Yields have also advanced in other parts of the world, including Australia, France and Germany.
That sparked a hefty sell-off in New York as all three main indexes tanked – led by Nasdaq’s 3.5% plunge as tech firms are more susceptible to higher interest rates.
And Asia followed suit, with Tokyo, Hong Kong, Sydney, Seoul and Taipei down more than 2%, while Shanghai and Singapore shed more than 1%. There were also losses in Wellington and Jakarta.
The selling comes despite constant reassurances from Federal Reserve officials, led by boss Jerome Powell, that they are not worried about inflation, and the rise in Treasury yields is a sign that the economic outlook is bright – and rates will not rise for the foreseeable future.
Biden’s minimum wage blow
“With the US economic outlook boosted by pandemic improvement, vaccine distribution and the prospects of President Biden’s fiscal package getting through Congress, investors are now fixated on the risk of inflation and economic overheating,” said Tai Hui of JP Morgan Asset Management.
“Investors may not be fully convinced by the Fed’s commitment to keep monetary policy loose for an extended period.
“The likely rise in headline inflation, partly due to the low base from 12 months ago, could challenge this dovish view, even though we agree that sustained demand-side inflation pressure is still some quarters away.”
He added that the rise in yields “serves as a trigger to investors who have been looking for a reason for an equity market correction. Volatility will continue, but this could provide an interesting opportunity for investors to reload on equities”.
Silvia Dall’Angelo at fund manager Federated Hermes added: “Central banks’ liquidity will continue to flow abundantly throughout 2021 at least, yet it’s unclear whether markets can ever get enough of it.”
In Washington, the House is expected to vote on Biden’s enormous economic rescue package later in the day, though his hopes of including a US$15 (RM61)-an-hour minimum wage in it were dealt a blow yesterday when an official said it could not be passed using a simple majority in the Senate.
Still, the vast majority of the US$1.9 trillion package – which does include US$1,400 cash handouts – is expected to get through Congress and be signed by the president later in March.
Key figures around 0230 GMT
Tokyo – Nikkei 225: DOWN 2.4% at 29,446.17 (break)
Hong Kong – Hang Seng: DOWN 2.1% at 29,455.12
Shanghai – Composite: DOWN 1.3% at 3,539.11
Euro/dollar: UP at US$1.2177 from US$1.2175 at 2130 GMT
Pound/dollar: DOWN at US$1.4010 from US$1.4011
Euro/pound: UP at 86.90 pence from 86.89 pence
Dollar/yen: DOWN at ¥105.91 from ¥106.25
West Texas Intermediate: DOWN 0.6% at US$63.16 per barrel
Brent North Sea crude: DOWN 0.3% at US$66.70 per barrel
New York – Dow: DOWN 1.8% at 31,402.01 (close)
London – FTSE 100: DOWN 0.1% at 6,651.96 (close). – AFP, February 26, 2021
