Global stock markets made a mixed start to the week as participants’ nerves remained stretched following the turbulence seen in recent sessions.
Tokyo provided a strong early platform as the Nikkei 225 leapt nearly 4 per cent – its biggest one-day gain since June 2013 – after reports that Japan’s $1.2tn public pension fund was likely to double its holding of domestic stocks.
But the mood was more cautious in Europe, as technology stocks were hit by a profit warning from Germany’s SAP, and the energy sector suffered from a renewed slide in crude prices. The FTSE Eurofirst 300 fell 0.6 per cent.
Wall Street had its own tech scare as IBM shares fell sharply after the company reported third-quarter earnings that fell far short of expectations.
But the S&P 500 recovered from an early dip to close 0.9 per cent higher at 1,903 , leaving the US equity
benchmark 5.7 per cent below a record intraday high struck a month ago. The CBOE Vix volatility index, Wall Street’s “fear gauge”, was down 14.7 per cent at 18.75 in late trade, back below its long-term average of 20.
At one stage last week, the S&P was down 9.8 per cent from that peak – putting it on the verge of official “correction” territory – as the weight of potential headwinds to further market progress finally became too much to bear.
“The ending of American quantitative easing, problems with European QE at a time when eurozone growth is falling, military involvement in the Middle East, Ebola, falling Chinese growth and demonstrations in Hong Kong – it could be any of the above or any combination of them,” said Jim Wood-Smith, head of research at Hawksmoor Investment Management.
“None has been sufficient in isolation, but together the effect has been to change the markets’ mood from nonchalant indifference to deep concern.”
Those concerns prompted a scramble for high-quality government bonds – to the extent that the 10-year US Treasury yield plunged as much as 35 basis points on Wednesday, while the two-year yield hit a seven-month low.
The Vix briefly rose above 31 to levels not seen for three years.
Some relief came towards the end of last week courtesy of the world’s central banks. James Bullard, president of the St Louis Federal Reserve, suggested that the US central bank should consider delaying the end of QE, while the Bank of England’s chief economist said UK interest rates might have to stay low for longer.
Furthermore, the European Central Bank promised that the start of its
programme of covered bond and asset-backed security purchases was imminent – a pledge that was confirmed
But there were worries among some analysts that continued Fed accommodation could lead to further problems.
“The possibility of a continued central bank ‘put’ in response to the latest financial turmoil has sent fast money front-running the rest of the markets to chase higher yields created by the latest sell-off as the markets’ well-rehearsed buy-the-dip reflexes kicked in,” said Lena Komileva at G+ Economics.
“The longer Fed liquidity continues to suppress financial volatility the more painful the eventual markets hangover will be. The greater the market fallout from the end of QE, however, the more inclined the markets expect the Fed would be to underwrite markets
The undercurrent of nervousness in the markets, particularly in Europe, meant demand for core government bonds remained in place.
The 10-year German Bund yield – which moves inversely to its price – fell 1bp to 0.85 per cent, while the equivalent Treasury yield was 2bp lower at 2.18 per cent.
But lingering worries about the outlook for eurozone growth and inflation kept up the pressure on sovereign yields in the region’s periphery. Greece’s
10-year yield – which last week briefly leapt above 9 per cent – was still very elevated at levels above 8 per cent.
Spain’s 10-year yield rose 8bp to
2.22 per cent and Italy’s climbed 9bp to 2.58 per cent.
The softening of US yields did little to help the dollar. The US currency
was down 0.2 per cent against a basket of peers, as it held steady against the yen at Y106.83 and the euro rose 0.4 per cent to $1.2808.
Gold extended last week’s rise by $8 to $1,245 an ounce – putting it on course to reach a five-week closing high.
remained on the back foot, with Brent oil settling 76 cents lower at $85.40 a barrel – not far away from last week’s four-year low beneath $83 – while copper fell 1.2 per cent in London to $6,560 a tonne.