Global equities kicked off the week in rally mode as bond markets steadied after wild swings last week.
In Europe, both the region-wide Stoxx 600 and London’s FTSE 100 benchmarks were up 1.4 per cent in afternoon trading on Monday. Frankfurt’s Xetra Dax added 1 per cent and CAC 40 in Paris was up 1.3 per cent.
Wall Street was set to follow European bourses higher, with future trading pointing to the blue-chip S&P 500 index opening up 1.2 per cent, rebounding from a weekly fall of 2.5 per cent.
Japan’s Topix index closed up 2 per cent while Australia’s benchmark S&P/ASX 200 climbed 1.7 per cent. China’s CSI 300 index of Shanghai and Shenzhen-listed stocks ended the session 1.5 per cent higher and Hong Kong’s Hang Seng added 1.6 per cent.
The gains for European and Asia-Pacific equities followed a rebound in the price of US government debt at the end of last week. The yield on the 10-year US Treasury continued to slide on Monday, falling to 1.43 per cent after dropping 0.06 percentage points on Friday following a 12-month high in the previous session.
“It’s all about bonds,” said Willem Sels, chief investment officer at HSBC’s private bank, who said expectations for a continuation of “ample” stimulus measures from global central banks provided a “powerful” boost for risk assets.
That thesis came into play on Monday when Australia’s central bank said it would purchase A$4bn (US$3bn) in long-term bonds, double the usual amount, as it attempts to ease a heavy sell-off that has hit its markets. The RBA had sharply increased its purchases of short-term bonds last week as its sovereign debt endured successive waves of intense selling.
The Australian 10-year yield tumbled almost 0.25 percentage points on Monday to 1.66 per cent, marking the biggest rally since a period of turbulent trading in global financial markets last March. It had surged as high as 1.973 per cent last week.
Volatility in global debt and equity markets has been stoked by widening concerns that a broad economic recovery from the pandemic could spur inflation, prompting central banks to withdraw unprecedented monetary policy support.
“Global real yields could rise further,” said Robert Buckland, chief global equity strategist at Citigroup. “This is bad for equity markets, especially those tilted towards highly rated growth stocks.”
He said this was particularly so in the US, where the valuations of big tech companies had been buoyed by low rates.
While low rates increase the current value of tech groups’ future cash flows, the present value of future earnings falls if rates rise.
Inflation expectations were heightened at the weekend when the US House of Representatives passed President Joe Biden’s $1.9tn coronavirus stimulus package, months after earlier support measures expired.
Those expectations also fed through to commodities markets. Brent crude, the international benchmark, added 1.1 per cent to $65.13 a barrel while West Texas Intermediate, the US marker, rose 0.6 per cent to $61.83.