Shares Grind Higher; Bonds Brandish Recession Warnings

LONDON—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 program, and as warring Russia and Ukraine held their first face-to-face talks in more than two weeks in Turkey.

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.

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 realized, 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 percent for the year from 2 percent 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.”

Battered Yen

Japanese shares had closed up more than 1 percent in Asia overnight, although Chinese stocks and oil both slid as Shanghai continued to lock down to combat a COVID-19 surge.

A Japan yen note is seen in this illustration photo taken on June 1, 2017. (Thomas White/Illustration/Reuters)

In Tokyo, the Bank of Japan had vowed to keep monetary policy ultra-loose, offering to buy unlimited amounts of 10-year government bonds to prevent its bond yields from rising too much further.

The central bank was finding it tough going, however. The 10-year JGB yield stood at 0.245 percent on Tuesday, hovering near the BOJ’s implicit 0.25 percent cap.

This also weighed on the yen, which was at 123.54 per dollar even after staging a small recovery from its bruising the day before.

“Excess volatility and disorderly currency moves could hurt economic and financial stability,” Japan’s top currency diplomat Masato Kanda told reporters on Tuesday, confirming the resolve of Japan and the United States to closely communicate on exchange-rate issues.

Elsewhere, trading remained choppy. Investors will favor markets that are lagging the Fed’s rate hike, operating on “a day-to-day trading mentality” amid market noise and short-term developments, said Chi Lo, senior market strategist APAC at BNP Paribas Asset Management.

“There is not really even medium-term direction that the market is following,” he said.

Among commodities, U.S. crude lost 0.7 percent to $105.17 per barrel and Brent was at $111.65, also down 0.7 percent.

China’s financial hub of Shanghai on Tuesday tightened the first phase of a two-stage COVID-19 lockdown, after it reported a record 4,381 asymptomatic cases and 96 symptomatic cases for March 28—though the caseload remains modest by global standards.

“Certainly commodity markets will not be comfortable in the short term with China shutting down,” Lo said. Many observers estimate less than 5 percent growth this year for the world’s second-biggest economy, he said, a view he rated as “too pessimistic” given expectations for stronger stimulus measures.

Spot gold dropped 0.1 percent to $1,922.24 an ounce.

By Marc Jones



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