Currencies

China capital curbs reflect buyer’s remorse over market reforms

Last year the reformist head of China’s central bank convinced his Communist party bosses to give market forces a bigger say in setting the renminbi’s daily “reference rate” against the US dollar. In return, Zhou Xiaochuan assured his more conservative party colleagues that the redback would finally secure coveted recognition as an official reserve currency […]

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Capital Markets

Mnuchin expected to be Trump’s Treasury secretary

Donald Trump has chosen Steven Mnuchin as his Treasury secretary, US media outlets reported on Tuesday, positioning the former Goldman Sachs banker to be the latest Wall Street veteran to receive a top administration post. Mr Mnuchin chairs both Dune Capital Management and Dune Entertainment Partners and has been a longtime business associate of Mr […]

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Banks

Financial system more vulnerable after Trump victory, says BoE

The US election outcome has “reinforced existing vulnerabilities” in the financial system, the Bank of England has warned, adding that the outlook for financial stability in the UK remains challenging. The BoE said on Wednesday that vulnerabilities that were already considered “elevated” have worsened since its last report on financial stability in July, in the […]

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Currencies

China stock market unfazed by falling renminbi

China’s renminbi slump has companies and individuals alike scrambling to move capital overseas, but it has not damped the enthusiasm of China’s equity investors. The Shanghai Composite, which tracks stocks on the mainland’s biggest exchange, has been gradually rising since May. That is the opposite of what happened in August 2015 after China’s surprise renminbi […]

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Financial

Hard-hit online lender CAN Capital makes executive changes

The biggest online lender to small businesses in the US has pulled down the shutters and put its top managers on a leave of absence, in the latest blow to an industry grappling with mounting fears over credit quality. Atlanta-based CAN Capital said on Tuesday that it had replaced a trio of senior executives, after […]

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Archive | November, 2016

Councils cut Co-op Bank accounts

Posted on 31 May 2013 by

Co-Operative Bank Plc's Banking Units After Moody's Downgrade

Local authorities have started to cut their exposure to the Co-operative Bank after taking advice from independent advisers amid concerns about the health of the mutual lender.

More than 100 councils have nearly half a billion pounds on deposit at the group, which was downgraded six notches by Moody’s in early May over concerns that the bank’s capital was coming under pressure.

    Financial advisers, who work closely with local authorities, have been “steering councils away from the Co-operative” in recent weeks, according to one government official.

    The Co-op declined to comment, but a person familiar with the bank said only a handful of councils had cut their exposure. The downgrade, he added, would have automatically triggered some councils to review their position.

    The bank’s £460m of council deposits is a small fraction of total customer deposits of £36.9bn at the end of last year. Following the Moody’s downgrade, it said it had high levels of liquidity.

    Newcastle city council told the Financial Times it had been advised to cut its investment with the mutual, which is exploring ways to buttress its capital.

    It was continuing “normal banking arrangements” in the short term, a council spokesman said. But, he added, they were heeding financial advisers to “minimise the level of our investment with the bank”.

    Northumberland county council confirmed it was reducing its exposure “to protect the council’s financial interests”. North Somerset council said it had cut its investments with the Co-op last year after a previous downgrade. While it had kept the group as its core bankers – to avoid a “knee jerk reaction” – it said it would reduce its daily cash balance to close to zero. That “surplus” money would have typically been between £2m to £10m a day in normal conditions.

    Under the Financial Services Compensation Scheme (FSCS) councils would only see their first £85,000 of money protected in the event of a bank crash, the same as an individual depositor.

    Council leaders were badly stung during the 2008 Icelandic bank crisis, with many large authorities losing their deposits in local banks – which were recovered only after a lengthy political and legal battle.

    The Co-operative reported the equivalent pre-tax loss of £599m for the last year.

    Many charities that use the bank have also been seeking advice as to whether they should keep their money on deposit there, according to an expert in charity finance.

    Tony Assender, director of Astleigh Consulting, a treasury adviser, said some of his university clients were also concerned. “But a lot of them have invested in the Co-op on fixed-term deposits, so there is nothing they can do,” he said. “I don’t predict a stampede but the next few weeks are crucial.”

    Kent county council, which had £50m invested with three Icelandic banks in 2008, said it did not bank with the Co-op. “The reality was that their rating was already too low to be on our approved list even before the downgrade,” it said.

    Tower Hamlets, the London borough, said it was “actively monitoring” the situation alongside its advisers. However some authorities said they had no plans to change their arrangements, including Manchester city council.

    Birmingham said it did not want it to “look like we are panicking”. “When our contract runs out we will re-look at it again, but there is no panic,” it said.

    Additional reporting by Aaron Hagstrom

    Bond investors wake up to QE withdrawal

    Posted on 31 May 2013 by

    Jeremy Renner stars in The Hurt Locker©Summit

    Explosive scenario: central banks are still expected to act as bomb disposal squad when needed, but fears are growing

    What is the difference between 1.6 per cent and 2.2 per cent? Either: not much, or a potentially explosive shift in the way global investors view the world that presages turbulent market conditions ahead.

    Yields on US government debt, which move inversely to prices, have surged during May and peaked this week, leaving holders nursing their worst monthly loss since December 2010. Ten-year Treasury yields hit 2.23 per cent on Wednesday, up from 1.61 per cent at the start of May, and were back to 2.20 per cent in volatile Friday trading.

      The immediate cause was concern that the Federal Reserve would soon start to “taper” its open-ended bond purchases – with far-reaching consequences for US debt markets and perhaps signalling a turning point in the 30-year Treasury bull market.

      As investors awoke to the realisation that extraordinary monetary stimulus through “quantitative easing” cannot last for ever, repercussions were felt worldwide. Emerging economies’ bond markets also saw yields jump sharply, as did Japan, where the equity market went into a tizzy. At one point the Nikkei 225 index was down 15 per cent from last week’s peak.

      Unsettling investors were worries that the central bank “put” led by the US Fed that has driven asset prices sharply higher over the past year – beyond levels justified by economic fundamentals – was unwinding. “I can’t say where, but there will be unexploded bombs going off as yields start to rise,” says Kevin Gaynor, global head of asset allocation at Nomura.

      Confidence remains high that central bankers will continue to support economies – and act as the bomb disposal squad when needed. Even the US has yet to see a self-sustaining recovery while “the Bank of Japan has its work cut out”, argues Mike Amey, head of sterling portfolios at Pimco. “We think that the bull market is over, but we don’t believe the secular bear market has started.”

      The stresses in markets, however, highlighted their vulnerability to any hint of a shift in Fed support. Central bank action over the past four years has compelled investors to borrow at low overnight rates and pile into higher yielding debt in so-called “carry trades”. Nobody knows the extent of such positioning, but the danger is that investors try to get ahead of any attempt by the Fed to remove the punchbowl.

      “There is a risk that, even before the growth issue is clear, the markets move to an extreme as so much leverage and one-sided positions have built up at the Fed’s request over recent years,” says Richard Gilhooly, strategist at TD Securities.

      This week’s turmoil “underscores concern about emerging market excesses, which have been the side-effect of very low and stable US Treasury yields”, adds Mr Gaynor. “If they are going up, we should be more worried about things like leveraged financial systems in emerging economies.”

      Ripple effects are already clear in US investment grade corporate debt markets, where total returns for the year have fallen back into negative territory. Blue-chip companies have sold debt at record low interest rates, and there is “no way investment grade bonds can escape a violent sell-off in Treasuries”, warns Edward Marrinan, head of US macro credit strategy at RBS Securities.

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      However, the impact – so far at least – has been noticeably less pronounced on US equities and junk-rated debt. “If we see stability in Treasury yields, then high-yield bonds can skate through,” says Mr Marrinan. “By virtue of their higher coupons and capital gains, the asset class has greater insulation than investment grade bonds against a back-up in Treasury yields.”

      A better performance by equities and high-yield bonds is consistent with the view that Fed tightening would only come when US economic prospects picked up, reducing the default risk of lower-rated companies and increasing earnings prospects. In Europe, the pattern in bond markets has been the opposite, however, with a bigger sell-off recently in high-yield than investment grade markets.

      The next big event is the May US jobs data due at the end of next week. “A strong payrolls number would add to investors’ belief that the Fed could pull back on their bond buying,” says Ajay Rajadhyaksha, strategist at Barclays.

      Jay Mueller, senior portfolio manager at Wells Capital, adds: “The Fed is in no hurry to change things, but if we get stronger economic numbers, then investors will connect the dots and say we have moved to a higher gear.”

      A US economy in higher gear would intensify the upward pressure on bond yields. Mr Rajadhyaksha argues the Fed would want to avoid an unruly sell-off that could imperil the economy’s progress. So credit markets and equities would remain supported.

      But still there could be plenty of unexpected eruptions. Didier Saint-Georges, investment committee member at Carmignac, the French fund manager, warns: “As the destiny of financial markets hinges more than ever on central bank action, increased volatility is going to be part of our life for the medium-term future.”

      Kanoria buys Hypo’s domestic banking arm

      Posted on 31 May 2013 by

      Hypo Alpe Adria, one of the Austrian banks that had to be nationalised during the financial crisis, has taken its first step towards reprivatisation by selling its domestic banking unit, HBA, to an Indian investor.

      The European Commission has been putting pressure on the Austrian government to break up and reprivatise the lender by the end of this year, or make it return the roughly €2bn it has received in state aid since it was nationalised in 2009.

        The government has been keen to avoid doing this too quickly for fear of having to sell at knock-down prices.

        However, Hypo said on Friday that Sanjeev Kanoria, the London-based head of Anadi Financial Holdings, had agreed to pay €65.5m for the assets.

        Gottwald Kranebitter, Hypo chief executive, said the move was an important step achieved in the face of very difficult market conditions across Europe.

        He added that Mr Kanoria was “not only clearly the best bidder, but also has first-class experience in international business and excellent connections to leading financial institutions”.

        Mr Kanoria said that alongside preserving the character of the bank his central goal was “above all ensuring the absolute safety of customer deposits”.

        The transaction must still be approved by the FMA, Austria’s financial watchdog.

        The guarantees that the Austrian state of Carinthia has given to HBA remain in force and are not affected by the deal.

        US judges overturn Citi’s win over EMI

        Posted on 31 May 2013 by

        Citigroup’s 2010 victory over Guy Hands in a bitter courtroom feud over his ill-fated £4.2bn buyout of EMI has been overturned on appeal. It sets the stage for a retrial pitting a prominent London dealmaker against one of private equity’s most outspoken investors.

        A US federal appeals court found that Judge Jed Rakoff had incorrectly instructed the jury in the three-week fraud trial which ultimately ruled against Mr Hands’ contention that the US bank had misled Terra Firma, his private equity firm.

          The jury instructions had been based on an inaccurate understanding of English law, three circuit judges ruled, incorrectly shifting the burden of proof from Citigroup to Terra Firma. “Whether that error actually affected the jury’s determination is unknowable,” they wrote.

          The circuit judges dismissed as “unpersuasive” other arguments that Terra Firma had made for reversing the original verdict, but the ruling is an unexpected victory for Mr Hands and his legal team, led by David Boies.

          Mr Hands said through a spokesman: “We continue to believe that we have a strong claim, and with the jury instructions now resolved in our favour we expect to prevail in any subsequent trial.”

          Citigroup said: “We are confident we will again prevail at trial as Citi’s conduct in the EMI transaction was entirely proper. The original verdict made clear that Terra Firma’s baseless accusations of fraud were simply an attempt to gain leverage in debt restructuring negotiations.”

          Unless the two sides settle, a retrial could pit Mr Hands once more against his former friend, David Wormsley, the Citigroup banker who advised him on the EMI transaction. During the 2010 trial, Mr Hands noted that suing your banker is “something you would only do as a very, very last resort”.

          The appeals court noted that the original case had been a “he-said-she-said” dispute over whether Mr Wormsley had made misleading statements causing Terra Firma to overpay for EMI. In a retrial, a jury would start from the presumption that Mr Hands had relied on his banker’s advice.

          While the jury took only five hours to find in favour of Citigroup in 2010, Mr Hands pursued the appeal in the hope of recouping some of Terra Firma’s EMI losses for investors and restoring his reputation. The disastrous, high-profile EMI deal was struck in 2007 just as souring credit markets made it impossible for him to syndicate the debt.

          He told the court he had put two-thirds of his own wealth – or at least $100m – into the deal. Terra Firma pushed for $8bn in damages, but Judge Rakoff said before the verdict it could not have won more than $2bn.

          After Citigroup seized EMI from Terra Firma in February 2011, the partially taxpayer-owned bank ended up running the home to The Beatles, the Sex Pistols and Katy Perry until it was broken up and sold last year.

          Universal Music bought most of EMI’s record labels and a Sony-led consortium now owns most of EMI Music Publishing. Mr Hands is highly unlikely to be able to get the company back, but could push for financial compensation to recover some of the £1.7bn of equity Terra Firma put into EMI.

          UBS raises pay for key investment bankers

          Posted on 31 May 2013 by

          UBS has increased salaries for some of its investment banking staff in what analysts said was an attempt to retain key bankers.

          The employees who received increases on average saw their fixed pay rise by roughly 9 per cent, according to people familiar with the situation.

            The pay rises did not affect the whole investment bank, but targeted teams where UBS was concerned that it lagged rivals.

            Despite the adjustments, the investment bank’s total pay costs are not expected to rise, as the bonuses paid out by the division are falling.

            Switzerland’s biggest bank by assets revealed in February that its overall bonus pool fell 7 per cent year on year to SFr2.5bn in 2012, with the investment bank’s share slashed by 20 per cent as part of the bank’s efforts to recoup the fine it paid for manipulating the Libor interest rate.

            The changes to UBS’s pay structure fit into a broader industry trend in which banks are increasing fixed salaries, even as they come under intense pressure from regulators in various jurisdictions to rein in bonuses in the wake of the financial crisis.

            At the end of February, the EU proposed capping bankers’ bonuses at twice their salary, while in Switzerland, a set of proposals that include banning golden hellos and golden goodbyes at all listed companies is currently being turned into law.

            The decision to raise salaries comes eight months after UBS unveiled a radical plan to cut up to 10,000 jobs at its investment bank, while withdrawing from capital intensive businesses in fixed income and focusing on its traditional strengths in equities and advisory services.

            The overhaul is being overseen by Andrea Orcel, who was appointed co-head of the division last summer, and took sole control on the departure of Carsten Kengeter in February.

            Christopher Wheeler, an analyst at Mediobanca, said that the salary rises went hand-in-glove with the reorganisation.

            “Andrea Orcel knows that he has to look after the good people in UBS’s advisory and equities businesses, as the fact that they are no longer a full-service investment bank means they could lose staff, and thus business, in other areas,” he said.

            “Lots of investment banks have shrunk by accident; not many have done it on purpose. UBS is trying to do so, and it is key that it doesn’t lose its best people in the process.”

            UBS declined to comment.

            Hitachi eyes growth in UK direct lending

            Posted on 31 May 2013 by

            Hitachi Personal Finance, the consumer lending arm of the Japanese engineering group, is to offer the cheapest unsecured loans in Britain as it aims to seize a large chunk of the household credit market.

            Hitachi is offering a representative APR of 6.5 per cent, but it said up to one in 10 customers would receive rates below that – as low as 4.9 per cent.

              Competition in the unsecured personal loan market has increased in recent months as consumer credit returns to growth following three years of contraction.

              The Bank of England has predicted that average interest rates of 11 per cent in February are set to fall, after the availability of credit grew more than 10 per cent in the first quarter of 2013 compared with the last three months of 2012.

              The Derbyshire, part of Nationwide Building Society, currently offers the cheapest APR on unsecured personal loans at 5 per cent.

              Hitachi wrote £1.4bn of consumer credit in the last financial year, mostly tied to purchases of household goods via retailers such as B&Q and DFS. Already a strong player in the market for the “point of sale” credit that is sold to customers in shops, it is now seeking to grow a direct lending business of a similar size.

              About £2bn of personal loans are extended each month, with the biggest banks accounting for almost 60 per cent.

              Gerald Grimes, managing director, said: “We’re not a bank and we felt it was time borrowers with a whiter-than-white credit history had the chance to get a better deal, and that’s what we’re giving them.”

              He said the group had the infrastructure and risk analysis models to manage lending direct to customers after more than 30 years of dealing with them via retailers.

              “We are targeting £1bn annually within five years. That would be 5 to 6 per cent of the market. The banks have such a large share they don’t offer good service, and decline 80 per cent of applicants. We’ll lend to many of those turned down.”

              The company, whose consumer division is based in Leeds, has trialled loans for existing customers under the brand name Savvi. It has written £10m-£15m of credit a month for the last year.

              This weekend, it will launch under the Hitachi name by advertising online and on the London Underground. It promises an instant online decision and, for successful applicants, the money within 24 hours, with loan durations lasting up to five years.

              Its point-of-sale loans are subsidised by retailers offering interest-free credit on expensive items such as kitchens and sofas.

              In the year to March 31 2012, Hitachi Personal Finance increased revenue from £89.7m to £103.9m and profits from £22.1m to £34m compared with the year before. However, retailers are beginning to reduce their generous subsidies and Hitachi’s point-of-sale volumes are set to decline.

              Guriev re-elected to Sberbank board

              Posted on 31 May 2013 by

              Sergei Guriev, Rector of the New Economic School in Moscow

              Sergei Guriev, a liberal economist who fled Russia after being interrogated by police in April, was re-elected to the supervisory board of state-owned Sberbank on Friday, underscoring the strong support for him in Russia’s liberal business and political circles.

              Mr Guriev received the most votes from Sberbank shareholders – 22.7bn out of a possible total of 367bn. This was even more than for the bank’s chairman.

                The result comes a day after the economist began detailing the pressure he had been under from Russian law enforcement officers as they questioned him as a witness in a criminal case.

                In April, investigators interrogated him and seized five years of his email correspondence, apparently seeking information about testimony he gave in defence of the oligarch Mikhail Khodorkovsky in a 2010 trial. Mr Khodorkovsky has been in prison since 2003 – widely viewed as political retribution for challenging President Vladimir Putin.

                Mr Guriev’s links to opposition figures are thought to be the main reason that he has invited the attention of Russia’s law enforcement agencies, who have been cracking down on dissidents since Mr Putin began a third presidential term in May 2012.

                Mr Guriev told Ekho Moskvy radio on Thursday that he made the decision to leave after Mr Putin had made known that he would not interfere with the investigation against him.

                “I respect that position. I think not in every case should one be asking the president of the country to intervene,” he said. “But on the other hand, I have a preference for living in a country where I am not threatened.”

                He added that he did not foresee returning home in the near future: “I don’t see in what way there could be guarantees that I would not lose my freedom.”

                German Gref, Sberbank’s chairman, said the bank would seek to have Mr Guriev serve on its supervisory board from abroad, despite the fact the economist had submitted a letter of resignation after voting was already under way.

                “Sergei [Guriev] is a very effective person,” said Mr Gref. “He is very professional, very tough and does not compromise. I really hope that we have not lost him.

                “Anything is possible – I hope that he will continue to work with us, and the circumstances that led him to take this decision [to resign] are not final.”

                Mr Gref said Mr Guriev had already received 6 per cent of the total vote when he sent his resignation letter, and would therefore be elected to the board and allowed to participate in meetings from abroad, possibly via teleconference. Candidates must resign 70 days in advance of the annual shareholders’ meeting, while Mr Guriev submitted his letter only two days beforehand.

                Reached in France, Mr Guriev said he would continue to serve on Sberbank’s board if the group’s lawyers and the market regulator allowed it. “I am grateful to all who voted for me and will do my best to serve the shareholders interests,” he told the Financial Times.

                The central bank, which owns a 50 per cent plus one share stake in Sberbank, did not vote for Mr Guriev, central bank chairman Sergei Ignatiev said on Friday.

                Mr Guriev was elected to the supervisory board alongside Mr Gref, former finance minister Alexei Kudrin and Mr Ignatiev, as well as Alexei Ulyukaev, the deputy central bank head who has been tipped to be Russia’s next economy minister. 

                Swiss tax proposal jolts bank employees

                Posted on 31 May 2013 by

                For the banks caught up in Switzerland’s bitter tax dispute with the US, the Swiss government’s plan to create a legal basis for settlements with US authorities offers the welcome prospect of closure.

                For bank employees, the plan is rather less appealing – because the business records that Swiss banks can now disclose include the names of staff who were involved in dealing with US clients.

                  Even among staff who did not follow the example of Bradley Birkenfeld – a former Geneva-based UBS private banker, who famously hid diamonds in tubes of toothpaste to help clients move assets without detection – this is an unwelcome prospect.

                  “Of course bankers are worried,” said Denise Chervet, director of the Swiss Association of Bank Employees. “They don’t know what is going to happen, and it is never a nice feeling when you don’t know what someone is going to do with your data.”

                  Some of the 13 banks that the US has been investigating for at least two years, such as Credit Suisse and Julius Baer, received permission from the Swiss government to transmit business records last year, and have already begun doing so.

                  As a result, the banks and staff most affected by the new proposal – which still has to be approved by Switzerland’s parliament – are likely to be those that have not yet entered negotiations with the US authorities. Third parties, such as lawyers, who had dealings with US customers, may also be affected.

                  The Swiss government’s proposed bill contains several provisions on the actions banks must take to protect bankers whose names end up in the hands of US authorities.

                  These range from informing bankers in advance if their details will be transferred and assuming legal costs incurred by named employees, to pledging not to ask prospective employees about whether they have been caught up in the transmission of data to the US.

                  In addition, a SFr2.5m hardship fund will be set up to cover employees who find themselves in a “personally, financially or economically difficult situation” as a result of banks’ co-operation with US authorities.

                  However, banks are less well-placed to prevent the thing that their employees fear most – namely, that the US will pursue charges against some of the staff whose details come into their possession.

                  The US is in possession of the names of more than 1,000 bank employees as a result of information provided by banking clients, according to Ms Chervet.

                  “A lot more names will be provided, but it is hard to say how many of those people will be charged with anything. If the banks settle with the US, it will have less incentive to go after individual bankers,” she said.

                  Euro motor firing on one engine

                  Posted on 31 May 2013 by

                  It is widely felt that the EU’s fabled Franco-German motor has recently been firing on one engine only. Chancellor Angela Merkel’s visit to Paris was an effort to show that the partnership is still vigorous. But the “contribution paper” to Europe’s policy debate that she offered jointly with François Hollande, France’s president, remains very much made in Berlin.

                  Given how fast the eurozone can realistically be expected to move, there is much to like about the policy proposals. First, both countries commit to finishing the basic design of banking union by June. That is a good sign after too much foot-dragging. Berlin is keeping a firm grip on the purse strings – the paper proposes that bank resolutions be funded through prepaid industry levies collected by national funds. But importantly, the door is left open to direct recapitalisation by the eurozone’s rescue fund, an idea Berlin has previously poured cold water on.

                    Second is the serious attention paid to the need for eurozone economies to converge. The tool of choice is a German idea of having governments sign legally binding contracts with the European Commission. What good this will do depends, of course, on what the contracts stipulate. A monetary union does not just need the recent moderation in the push for universal austerity. True fiscal co-ordination must do more. When some countries have to cut deficits, others with more leeway should widen them to pick up the slack in demand. And reforms to narrow productivity gaps are more urgent than, and made harder by, fiscal consolidation.

                    Third, the two leaders call for ambitious changes to how the eurozone is governed from its current status as an intergovernmental club. They envisage a permanent president of the eurogroup of finance ministers and regular summits. They also want the European Parliament to establish new eurozone-only structures to give democratic legitimacy to the bloc. This would further the institutionalisation of a two-tier EU.

                    Politically, this is a German document, couched in language palatable to the French – such as due respect to national differences. That reflects the two countries’ strengths and weaknesses. Eurozone policy now pivots around Berlin, but Germany’s voice will be heard with more sympathy if it has Paris on board. France clings to the Franco-German axis as the one thing that stops domestic stagnation turning into external irrelevance. But the further Paris falls behind other countries’ efforts to reform, the less attractive a partner for Berlin it will be.

                    The direction of travel is clear. Berlin offers to share its resources – if Europe will agree to pool more sovereignty. Whether that goal is reached depends on how equal a partner Paris manages to be.

                    Markets whipsaw on Fed uncertainty

                    Posted on 31 May 2013 by

                    General Views Of Trading At The NYSE©Bloomberg

                    The worst month for US Treasuries in two years ended on Friday with whipsaw trading in the bond and stock markets, reflecting investor uncertainty about when the Federal Reserve will curtail its stimulus policies.

                    The New York morning was marked by a continuation of the Treasury market selling that has pushed yields higher – and prices lower – in May. The yield on the benchmark 10-year note rose as much as 15 basis points to 2.21 per cent as investors saw a robust report on midwest manufacturing as a sign the Fed could cut back on its bond-buying programme as soon as this summer.

                      But investors shifted gears in the afternoon, buying Treasuries and dumping stocks. After rising in early trading, the benchmark S&P 500 index closed 1.4 per cent lower – its biggest one-day loss since mid-April – while the yield on the 10-year Treasury finished at 2.13 per cent.

                      Analysts said the late turn in stocks unsettled investors who had been betting on falls in bond prices – and higher yields. Declining equity prices often increase the allure of bonds as a haven.

                      “No one likes to see equities close at their low on a Friday as it sets the market up for an ugly open the following week,” said Michael Kastner, managing principal at Halyard Asset Management, adding that short sellers in the Treasury market were closing positions later in the day.

                      The nervous trading came at an important inflection point. Many investors have been favouring stocks because dividend yields – averaging 2.08 per cent on the S&P 500 – have been higher than Treasury yields. But when Treasury yields climbed above that level, the case for stocks diminished.

                      The market moves highlight the tightrope central banks, led by the Fed, must walk in coming months. The Fed has kept rates low for years to stimulate the economy, encouraging investors to pile into stocks and riskier debt.

                      However, as signs of a US economic recovery grew in May, investors worried the Fed would withdraw its stimulus, hitting prices for government bonds around the world, corporate and emerging-market debt and US mortgage-backed securities.

                      In the UK, benchmark yields this week rose above 2 per cent for the first time since February. Yields in Germany and Japan were sharply higher.

                      “We are seeing the ramifications of open-ended quantitative easing from the Fed,” said William O’Donnell, strategist at RBS Securities. “It helped markets at the start, but the hard part is the process of withdrawing such stimulus.”

                      Much depends on the tone of the monthly US employment report due at the end of next week. David Ader, strategist at CRT Capital, said: “The Fed clearly doesn’t know how it will proceed other than to watch the data we’re all watching.”