Stock markets dropped on Thursday on rising concerns about prospects for the global economy, following days of sharp moves in government bonds that hinted at slower growth and inflation than previously expected.
Equities fell first in Asia before the negative mood spread into Europe and then to Wall Street — a move analysts blamed on expectations that US economic growth is about to peak at the same time as signs emerge of a slowdown in China.
The US S&P 500 index was down 1 per cent in afternoon trading in New York, while the technology-focused Nasdaq Composite slipped 0.7 per cent. Both indices had set records in recent days.
In Europe, the continent-wide Stoxx Europe 600 lost 2 per cent after Hong Kong’s Hang Seng index ended its session 2.9 per cent lower. Spain’s Ibex closed down 2.3 per cent and Italy’s FTSE MIB lost 2.6 per cent. The FTSE 100 in the UK was down 1.7 per cent.
“We are seeing an asset allocation change with people selling risky assets across the board and buying into the safer returns of government bonds,” said Shaniel Ramjee, senior investment manager at Pictet Asset Management.
There were choppy moves in government bond markets again on Thursday. The yield on the 10-year US Treasury note, which moves inversely to its price, fell as low as 1.276 per cent and was trading down 0.03 percentage points at 1.283 per cent after New York lunchtime.
The decline put the world’s benchmark bond yield, which influences borrowing costs for companies and households worldwide, at its lowest level since early February and on track for its biggest weekly drop since June last year.
This marked a contrast from the first half of this year when investors worried about the US economy overheating and sold Treasuries — whose fixed interest payments are eroded by inflation — to buy shares in businesses in economically sensitive industries such as banking and energy.
In minutes of the US central bank’s latest meeting released on Wednesday, Federal Reserve officials said that “uncertainty around the economic outlook was elevated”. Wall Street economists expect US gross domestic product to have expanded at an annualised rate of more than 9 per cent in the second quarter of this year, and to moderate thereafter.
Also on Wednesday, China’s government said it would use “timely” cuts in banks’ reserve ratio requirements to keep money flowing around the economy. Investors took that as a signal that Chinese second-quarter GDP data due next week “might fall short of market expectations”, according to Daiwa economist Chris Scicluna.
Chinese ports and factory districts have been grappling with outbreaks of the Delta variant of coronavirus, as have an increasing number of countries around the world. Japan on Thursday declared that Tokyo will be under a state of emergency throughout the Olympic Games, which start on July 23, to contain infections.
“Markets tend to focus on only a few things at once,” Ramjee said. “The focus has switched to US growth accelerating less than it has been . . . and there is now more attention on China.”
Analysts at Bank of America Merrill Lynch said technical factors also played a part in this week’s moves, as investors looked to cover souring bets that long-dated Treasury yields were set to rise.
The US dollar index, which measures the greenback against other major currencies, fell 0.3 per cent on Thursday. Brent crude, the oil benchmark, was flat at $73.46 a barrel.
Government bonds also rallied in Europe. Germany’s 10-year Bund yield briefly dropped 0.03 percentage points to minus 0.323 per cent, its lowest since March. It later settled at minus 0.31 per cent.
Markets were trading “on expectations we’ve seen the highest growth numbers being printed” after last year’s coronavirus shutdowns, said Maarten Geerdink, head of European equities at NN Investment Partners. He added that “price action” was “now self-feeding”, as traders sold stocks in case they were hit harder.