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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

FTSE 100 suffers biggest fall since October as bond sell-off spooks markets – as it happened

The City of London Financial District
The City of London Financial District Photograph: Commission Air/Alamy Stock Photo

Wall Street close

A late PS: The US stock market has closed after a volatile week, and a rather choppy day.

The Dow Jones industrial average shed 1.5% by the closing bell, dropping by 469 points to 30,932.

The broader S&P 500 index did better, down 0.5% or 18 points at 3,811.

And the Nasdaq managed a modest recovery, finishing 72 points higher at 13,192. That’s a gain of 0.56%, so only recovering a slice of Thursday’s 3.5% tumble.

But overall, it was a nervous day dominated by concerns about rising US bond yields, and worries about inflation.

Reuters reports:

“There’s no question that the path in rates today is higher,” said Andrew Mies, chief investment officer at 6 Meridian.

Financials and energy shares, the best performing S&P sectors this month, slipped on Friday. Technology stocks rose and semiconductor stocks advanced.

“There are a few tailwinds for stocks that we shouldn’t lose sight of,” Mies said, citing President Joe Biden’s $1.9 trillion economic aid package before Congress.

The S&P 500 value index dropped while the growth index rose in a reversal of this month’s trend.

And that really is all for today...

Full story: Global stock markets drop as inflation fears prompt sell-off

And finally... here’s my colleague Julia Kollewe’s news story about the markets today:

Global stock markets ended February deep in the red, as fears of higher inflation prompted a sell-off in government bonds and spread anxiety across financial markets.

The UK’s FTSE 100 index fell 168 points to 6,483, a 2.5% drop – the biggest one-day fall in percentage terms since the end of October.

The UK stock market suffered the heaviest losses in Europe, while Germany’s Dax fell 0.67%, France’s CAC slid 1.4%, Italy’s FTSE MiB shed 0.9% and Spain’s Ibex lost 1.1%. The Europe Stoxx 600 index tracking the biggest European companies fell 1.7% and is down 2.5% over the week as a whole.

Energy companies, mining stocks and property firms were the worst-performing sectors in London. They would be hit hard if central bankers started moving away from ultra-low interest rates and tightened policy to fight inflation.

Michael Hewson, chief market analyst at the trading platform CMC Markets UK, also noted that weaker oil and copper prices prompted some end-of-week profit-taking on the likes of BP, Royal Dutch Shell, Anglo American and Antofagasta.

On Wall Street, the Dow Jones is currently down 358 points, or 1.1%, leaving the index at 31,043. The Nasdaq is up 116 points, or 0.9%, after suffering the heaviest sell-off since October on Thursday when it fell 3.5%.

Government bond prices dropped again, pushing up yields further. Five- and 10-year gilt yields rose to their highest level since March, after the Bank of England’s chief economist, Andy Haldane, warned that an inflationary “tiger” might be on the loose, which means that borrowing costs could be raised sooner than markets expect. In a speech entitled Inflation: A Tiger by the Tail?, he warned central bankers against becoming complacent about the risks posed by rising inflation.

US Treasury yields have also surged on expectations of stronger economic growth and higher inflation in the wake of the $1.9tn fiscal stimulus package proposed by the president, Joe Biden.

Sterling has also been hit by the rush away from riskier assets. The pound fell 0.5% to $1.394 against the dollar, away from the near-three-year high of over $1.42 of earlier this week. Gold prices fell to an eight-month low, down 3%.

Weak economic figures also fuelled the stock sell-off. US consumer sentiment hit a six-month low, according to the University of Michigan’s monthly healthcheck.

Chris Beauchamp, chief market analyst at the trading platform IG, said: “This is the most serious move to the downside in months; not since the see-saw movement of September and October have we seen such a serious drop [in stocks]. It is clear that very few investors are willing to step up and buy the dip, at least for the time being.”

Goodnight, and have a lovely weekend. GW

The Financial Times says this has been a tough week for investors who were bullish about US government bonds (or Treasuries).

As the gentle drop in prices turned into a rush, some investors are fretting whether the sell-off will persist, and if turmoil will spread to other assets.

Here’s a flavour of the FT’s piece tonight:

With expectations for rising inflation building, prices on Treasuries had been sinking for most of this month, pushing yields to their highest point since the coronavirus crisis struck markets a year ago.

But on Thursday, a shaky US government debt auction caused 10-year yields to spike as high as 1.61 per cent, ending the day with a gain of 0.14 percentage points.

“We are eating humble pie, after the bond market served up a lesson in humility,” said HSBC’s head of bond research, Steven Major. “The probability of lower bond yields has fallen because of much larger US fiscal stimulus than we had expected, and the development of a number of effective vaccines.”

Bonds remain strong in historic terms. But for the typically staid and steady US government debt market, that scale of move is rare. The incident has rekindled memories of chaotic scenes in Treasuries just under one year ago, and led investors to question whether a lasting and destabilising rise in yields is at hand.

“Are we at a paradigm shift? That’s what people are worried about, that history isn’t much of a guide for us now,” said Joyce Chang, chair of global research at JPMorgan.

More here: ‘Humbling’ week in bond markets leads to fears of paradigm shift

Gold hits eight-month low

The gold price has dropped to an eight-month low this afternoon.

Gold traded as low as $1,717 per ounce, for the first time since last June.

With investors anticipating interest rate rises, bullion was out of favour, says Fawad Razaqzada, analyst at Think Markets:

Soaring yields are not good if you are bullish on gold and to a lesser degree silver, as this increases the opportunity cost of holding assets that pay no interest or dividends.

So precious metals are in danger of potentially dropping sharply next week, unless yields ease back.

Back in New York, the technology-focused Nasdaq has bounced higher again.

The Nasdaq Composite is now up 197 points, or 1.5%, at 13,316 points, clawing back some of Thursday’s 3.5% slump. Apple and Microsoft are both up over 2.3%.

But Wall Street is still in an edgy mood after the heavy selloff in government bonds this week. The Dow Jones industrial average is in the red - down 169 points or 0.5% at 31,232 points.

Here’s Bloomberg’s take on the day:

U.S. tech stocks rebounded on the last day of a tumultuous week as a global bond rout eased, leaving the yield on 10-year Treasuries near 1.5%.

Gains for Apple Inc., Microsoft Corp. and Facebook Inc. helped lift the Nasdaq 100 about 1%. Energy producers and banks were among the worst performers, dragging down the Dow Jones Industrial Average. The dollar jumped for a second day, helping fuel a slump in commodities from oil to gold to copper.

Sorry, there’s a typo in that last post (now fixed). The pound hit a near three-year high against the US dollar earlier this week, of course:

The pound vs the US dollar over the last five years
The pound vs the US dollar over the last five years Photograph: Refinitiv

The pound is still down against the US dollar today too.

It’s lost 0.4% or 0.6 of a cent so far today, to $1.395.

Earlier this week it hit a near three-year high over $1.42, before being dragged back.

Connor Campbell of SpreadEx reckons split at the Bank of England over inflation prospects hasn’t provided much support for sterling today.

It hasn’t helped that there have been conflicting comments from members of the Bank of England’s MPC.

While deputy governor Dave Ramsden has said that inflation risks are ‘broadly balanced’, chief economist Andy Haldane went both barrels with his hyperbolic speech on the difficulties of taming the ‘inflationary tiger’. This ignited the market’s fears of rising interest rates, leading to the severe losses posted by the FTSE.

Updated

European stock markets all had a poor day too, although not quite as bad as the FTSE 100.

France’s CAC dropped by 1.4%, while Germany’s DAX escaped quite lightly with a 0.6% drop. Italy’s FTSE MIB lost 0.9%.

European stock markets, close of trading, February 26
European stock markets tonight Photograph: Refinitiv

FTSE 100 tumbles 2.5%

Ouch. After a fairly brutal session, the FTSE 100 has closed down 168 points at 6483 points, a drop of 2.5%.

That’s its biggest one-day fall in percentage terms since the end of October, I reckon, and its lowest closing point since the start of February .

The FTSE 100
The FTSE 100 over the last three months Photograph: Refinitiv

Anxiety over the jump in government bond yields knocked every sector of the Footsie lower.

Mining companies were among the fallers, with Anglo American down 6.1% and Glencore losing 4.6%.

Commercial property group British Land fell 5.7%, while Scottish Mortgage Investment Trust, which holds stakes in technology firms such as Tesla and Amazon, lost 5% following the slump on the Nasdaq yesterday.

FTSE 100 by sector
FTSE 100 by sector today Photograph: Refinitiv

IMF's Georgieva Calls for Strong G20 Policies to Counter ‘Dangerous Divergence'

The International Monetary Fund (IMF) logo is seen outside the headquarters building in Washington.

IMF managing director Kristalina Georgieva has called on the leaders of the G20 to deliver ‘strong policies’ to support the recovery.

A year into the pandemic, Georgieva warns of “dangerous divergence” between economies, and within them.

Tackling it means faster vaccinations, more support for households and businesses, and additional support for the poorest countries - including debt relief.

Georgieva says the G20 must do these three things:

“First, speed up vaccinations across the world — it is the most impactful support for the recovery. We need international collaboration to accelerate production and make vaccines available everywhere as fast as possible.

“Second, resolve to provide lifelines to business and households, tailored to countries’ circumstances, until there is a durable exit from the health crisis. And prepare for risks and unintended consequences once policy support is gradually withdrawn. We are likely to see rises in bankruptcies and financial stresses, including excessive volatility in financial markets.

“Third, step up support to vulnerable countries. Together with the World Bank we are working with countries to implement strong reforms, address debt transparency and sustainability, and expand concessional financing. We support the prompt and effective implementation of the Common Framework, with Chad, Ethiopia, and Zambia being the first candidates. We are also reviewing the case for extending the Debt Service Suspension Initiative.

Professor Costas Milas of the University of Liverpool points out that the Bank of England doesn’t have an infallible record of forecasting inflation....

BoE policymakers have different views about inflation. Andy Haldane ‘sees’ an inflation threat whereas Dave Ramsden thinks that inflation risks are broadly balanced. One way of resolving this is to assess the MPC’s collective judgement. I plot actual inflation together with the one-year and two-year ahead BoE forecasts. Since 2006, the median bias of the one-year ahead forecast is almost zero (equal to 0.02) whereas the median bias of the two-year ahead forecast is slightly negative (i.e. -0.17). So far so good, you could say. Not at all!

The correlation between actual inflation and the one-year ahead forecast is very weak (only +0.17). The correlation between actual inflation and the two-year ahead forecast is negative (-0.34), that is, inflation moves in opposite direction to the forecast. Therefore, I wouldn’t feel very confident about the Bank’s collective judgement on inflation risks...

UK inflation expectations
UK inflation expectations Photograph: Professor Costas Milas

Takeover news: The French family behind Louis Vuitton and Christian Dior is to take control of the German sandal maker Birkenstock in a deal thought to be worth €4bn (£3.5bn).

Sainsbury’s and Argos workers are to receive a third pandemic bonus and a pay increase of more than 2% to match the real living wage outside London, as supermarket sales continue to boom during the high street lockdown.

Minimum hourly pay for Argos workers outside London will rise from £9.00 to £9.50 from March, and from £9.30 to £9.50 for Sainsbury’s staff. Pay for Sainsbury’s staff in central London will rise from £9.90 to £10.10, still short of the independently calculated living wage of £10.85...

European stock markets are lurching deeper into the red, as Wall Street’s earlier rally fades and government bond yields rise.....

The FTSE 100 is now down a hefty 2.4% in late trading, a drop of 160 points to 6491 points - and on track for its worst day of 2021 so far.

Energy companies, mining stocks and property firms are still the worst-performing sectors.

The Europe-wide Stoxx 600 is down 1.6%, with France’s CAC down 1.5%.

Over in the US, the Nasdaq’s early bounce has faded, and it’s down flat for the day, while the Dow Jones industrial average has shed 1%.

Government bond prices are dropping too, pushing up yields again and creating more anxiety in the markets.

US consumer sentiment hits six-month low

US consumer sentiment has hit a six-month low, according to the University of Michigan’s monthly healthcheck.

It has fallen to 76.8 in February, from 79 in January, and the lowest reading since last August.

The survey found that consumers’ expectations of future economic prospects have weakened, dropping to 70.7 from 74 in January.

The ‘current conditions’ index also dipped, to 86.2 from 86.7 last month.

Consumers are also expecting higher prices -- the one-year inflation outlook ticked up to 3.3%, from 3.0% in January.

Updated

FTSE 100 at two-week low

Back in London, the FTSE 100 is sliding further into the red as the weekend approaches.

The blue-chip index is now down 133 points, or 2%, at 6519 points - its lowest level in a fortnight.

Mining giant Anglo American is the top faller, down 6%, followed by commercial property group British Land, down 5%.

Only three stocks are up: airline group IAG (+4%), DYI chain Kingfisher (+0.9%), and consumer goods maker Reckitt Benckiser (+0.8%).

The FTSE 100, 26 February 2021

Wall Street opens calmly

After a torrid session yesterday, US stocks have opened more calmly.

Technology stocks are rallying, lifting the Nasdaq index up around 1.2%, or 158 points at 13,278 points.

That follows the Nasdaq’s worst day since October (it lost 3.5% on Thursday, in a rout that spread to Asia and now Europe today.)

The Dow Jones industrial average has dropped slightly, down 79 points or 0.25% at 31,322.

But the broader S&P 500 index is up 0.3%, or 12 points, at 3,842.

BoE's Ramsden: Inflation risks are broadly balanced

Hello.....Bank of England deputy governor Dave Ramsden doesn’t seem to believe that inflation is a hungry, sharp-toothed tiger, poised to pounce on complacent central bankers.

Unlike his colleague Andy Haldane, Ramsden reckons inflation risks are broadly balanced.

Reuters has the details:

Bank of England Deputy Governor Dave Ramsden said on Friday that risks to inflation were broadly balanced and described the expectations for prices as well-anchored.

“I would still see the risks broadly tilted to the downside - that’s for activity. Inflation: the risks are broadly balanced,” Ramsden said following a speech to the Institute of Chartered Accountants in England and Wales.

“When I look at the UK, I see inflation expectations - whatever measure you look at - well-anchored.”

That highlights that (as flagged earlier), Haldane’s concerns aren’t shared by everyone on the interest-rate setting MPC....

Ramsden’s speech, incidentally, was about ensuring that UK banks aren’t too big to fail:

The UK is now much better placed to deal with the failure of a UK bank. We have a resolution regime built on robust and coherent principles. As of now the UK banks are on track, as they should be 12 years after the end of the Global Financial Crisis, but it is vital that momentum is sustained.

As and when – for it is ultimately not likely to be an ‘if’ – we are called upon to use our powers to address a bank failure, we can be confident that the options available and outcomes arising will be superior to the alternatives and past experience.

US consumer spending rebounds

Over in the US, consumer spending has jumped as the latest stimulus payments reached families.

Consumer spending rose by 2.4% last month, the Commerce Department reports, driven by spending on goods such as recreational goods and vehicles (notably, information processing equipment), food and beverages.

Personal incomes jumped by 10% in January, the Department adds, as the $600 checks approved by Congress at the end of 2020 were cashed.

Nomura analysts George Buckley and Chiara Zangarelli suggest that the markets may be getting ahead of themselves by pushing up government bond yields so sharply.

They predict that output will contract across most of Europe in the current quarter.

And while vaccinations have speeded up after a slow start, there are still “significant near-term challenges” due to the current lockdowns.

UK PM Johnson announced a roadmap back to normality this week, but are the markets getting ahead of themselves? Bond yields are up over 30bp from recent lows in Germany and Italy, and over 50bp in the UK, driven by US Treasuries.

The ECB’s concerns are palpable, with Mme Lagarde noting the importance of the level of nominal yields, Chief Economist Lane saying that it could be “problematic” if markets move ahead of economic reality and Executive Board member Schnabel suggesting more monetary support may be needed if higher yields damage the recovery.

We don’t expect more ECB easing (PEPP expansion, lower rates), but do see a step-up in the weekly pace of PEPP purchases as a result.

The UK’s roadmap
The UK’s roadmap to end the lockdown Photograph: Nomura

Bitcoin on track for worst week since March

It’s been a bad week for bitcoin, too.

The cryptocurrency is on track for its biggest weekly fall since the market crash back in March, nearly a year ago.

It’s currently trading around $47,000, down 2% today, or more than 18% below the latest record highs over $58,000 set last weekend.

The price of bitcoin over the last year
The price of bitcoin over the last year Photograph: Refinitiv

Bitcoin is still up 60% so far this year, and has roughly quadrupled over the last six months. But this week’s reversal shows just how volatile cryptocurrencies can be.

Also, as we saw in March, it highlights that Bitcoin often falls in line with other risky assets, rather than acting as a safe-haven store of value.

Alexey Kirienko, CEO of investment company EXANTE, reckons some bitcoin investors are taking profits after the recent strong run.

Short-term movements like the current BTC correction are associated with the psychology of the crowd: some investors have decided to withdraw their profit. Also some funds investing in bitcoin are experiencing a massive outflow of money in recent days. It indicates a temporary increase in bitcoin sales but shouldn’t be considered as a global reverse of the growing trend in cryptocurrencies.”

“Gold peaked in August and also looked quite overbought. Then we saw a series of disappointing reports on the cooling demand for it after the boom in 2020. At the same time, the rise in bond yields reduced the attractiveness of investing in low-profit gold,” he concludes.

Reuters: UK gilt yields on track for biggest monthly rise since 2009

UK government bond prices have weakened again this morning, pushing up yields.

That puts gilt yields on track for their biggest jump in over 10 years, Reuters reports.

Here’s the Reuters story:

Ten-year gilt yields rose to 0.835%, 4 basis points up on the day, after Bank of England Chief Economist Andy Haldane warned that an inflationary “tiger” might be on the loose which could require more BoE action than markets expect.

If 10-year yields close near this level, they will have risen more than 50 basis points in February, the biggest monthly jump in yields since January 2009 when markets judged they had passed the low-point of the global financial crisis.

Five-year gilt yields also rose to their highest since March 2020 at 0.413% and their spread over German five-year bonds widened above 93 basis points, also the widest since March 2020.

FTSE 100 falls further

The sell-off has intensified, with the FTSE 100 share index now down by 1.4%.

Anxiety about the sell-off in the government bond market, and the jump in yields, has knocked 93 points off the blue-chip index, back down to 6558 .

Nearly every sector is down, led by mining stocks, property firms and energy producers.

They would all suffer if central bankers do tighten monetary policy to fight inflation, rather than trying to stimulate growth and employment.

The FTSE 100 by sector, February 26 2021
The FTSE 100 by sector, February 26 2021 Photograph: Refinitiv

Craig Erlam, Senior Market Analyst at OANDA Europe, says it’s turning into a wild end to the week:

The rapid rise in yields this week has come despite a perfectly competent performance from Fed Chair Jerome Powell in front of the Senate Banking and House Financial Services Committees. He gave his best assurances and it’s seemingly fallen on deaf ears.

I expect we’ll see a lot more of this from central banks in the coming weeks if stock go into freefall. Despite a couple of days of losses, we’re very much not in that territory yet - this is not a taper tantrum - and policy makers may be perfectly comfortable with what’s happening.

We are heading for a super-charged recovery, after all, thanks to the vaccine rollout and all the fiscal support measures over the last 12 months. Not to mention the desperation of people to escape their now beautifully decorated homes.

Investors should not need the central bank to hold their hand much longer and I expect by the end of the year, taper discussions will and should be starting. Of course, a lot can happen in that time and maybe that’s too optimistic at this stage but the point is simple. If Yellen envisages full employment by next year, central banks shouldn’t be employing crisis mode monetary policy when that happens.

But that’s a message better employed when the economy is fully open and firing, and the outlook is much clearer. And markets may be better positioned for it at that point. Right now, a lot of positivity is priced in and there’s frothiness everywhere you look. Not the time for taper talk or the tantrum may become self-fulfilling.

Here’s some reaction to Andy Haldane’s speech on inflationary tiger-taming, from the Independent’s Ben Chu:

And my colleague Phillip Inman:

BoE's Haldane: Taming the inflationary tiger is difficult and dangerous

The Bank of England’s chief economist, Andy Haldane, has now weighed in -- warning that inflation may be hard to tame as the recovery gathers pace.

In a speech titled “Inflation: A Tiger by the Tail?”, Haldane says central bankers face a ‘difficult and dangerous’ task to ensure prices stability during the recovery.

Notably, he also warns of the risk of complacency among central bankers about the risks of rising inflation.

He says:

Friedrich von Hayek once referred to inflation control as akin to trying to catch a tiger by its tail. That metaphor seems apt today. For many years, the inflationary tiger slept. The combined effects of unprecedentedly large shocks, and unprecedentedly high degrees of policy support, have stirred it from its slumber. In this environment, the tiger-taming act facing central banks is a difficult and dangerous one.

Haldane also points out that since the 1970s, global inflation has fallen steadily....

Global inflation
Global inflation Photograph: Bank of England

But some of the trends behind this may be fading, such as increased globalisation which has been undermined by trade protectionism, with the pandemic also leading to more localisation.

He also predicts that the end of the lockdown will lead to a burst of household spending, as people’s appetite to spend and socialise has been artificially suppressed.

Haldane says the risks to inflation in the UK are skewed to the upside, with the possibility of a “sharper and more sustained rise in UK inflation than expected”.

Inflation is the tiger whose tail central banks control. This tiger has been stirred by the extraordinary events and policy actions of the past 12 months. It is possible that, as vaccinations are rolled out and some degree of normality returns, inflation will return to a stable state of rest. Indeed, if risks from the virus or elsewhere prove more persistent than expected, disinflationary forces could return.

But, for me, there is a tangible risk inflation proves more difficult to tame, requiring monetary policymakers to act more assertively than is currently priced into financial markets. People are right to caution about the risks of central banks acting too conservatively by tightening policy prematurely.

But, for me, the greater risk at present is of central bank complacency allowing the inflationary (big) cat out of the bag.

Other members of the Bank’s Monetary Policy Committee, though, have sounded more relaxed about inflation risks.

MPC member Gertjan Vlieghe suggested last week that the Bank could need to step up its bond-buying programme, or consider other tools (such as negative interest rates).

The jump in bond yields comes just as chancellor Rishi Sunak finalises next week’s budget.

Borrowing costs are still very low in historic terms -- Britain can borrow at below 0.8% a year for the next decade (compared with around 5% before the financial crisis in 2008). That still means it’s a good time to borrow to invest in the future, and repair the damage of the pandemic.

But that’s up from around 0.2% at the start of 2021, before inflation expectations started to push up gilt yields.

Russ Mould, AJ Bell investment director, says:

“As the UK ten-year Gilt yield reaches 0.75%, the UK’s borrowing costs look like they are about to break a 25-year downtrend at a particularly inconvenient time, something that will have Boris Johnson and Rishi Sunak a little on edge.

UK 10-year bond yields
UK 10-year bond yields Photograph: AJ Bell

Precious metal prices have also been hit, with gold, silver and platinum prices all down.

Gold touching an eight-month low ($1,755 per ounce) earlier this morning before a small rebound.

The drop in the pound has helped the FTSE 100 claw back some of its earlier losses.

The blue-chip index is now down 0.5%, or 30 points, with multinationals such as Reckitt Benckiser (+2.2%) and pharmaceuticals groups AstraZeneca (+1.7%) and Hikma (+1.2%) in the risers column.

IAG are up 6%, despite posting that record loss this morning.

The British Airways owner say it has seen a big pick-up in bookings since the UK announced its plan to exit the lockdown, and is also calling for the introduction of digital health passes for passengers to help the travel sector.

CFO Steve Gunning also told reporters on a call that the company won’t need more funding, saying (via Reuters):

“We’ve got very strong liquidity going into 2021...so no we will not need additional funding,”

Here’s Bloomberg’s take on yesterday’s bond market drama:

After weeks of grumbling, the world’s biggest bond market spoke loud and clear Thursday -- growth and inflation are moving higher. The message wreaked havoc across risk assets.

Benchmark 10-year Treasury yields catapulted to the highest in more than a year at over 1.6% and traders yanked forward their opinion of how soon the Federal Reserve will be forced to tighten policy. Equities tumbled, as higher borrowing costs put pressure on soaring valuations.

Even Treasury Secretary Janet Yellen felt the sting, with record low demand for a fresh round of government debt.

Mark Dowding, CIO at BlueBay Asset Management, reckons we could see more market volatility next month, if the rise in bond yields continues.

The direction of government bond yields will hold the key to broader market direction, he explains:

  • Bond yields: BlueBay senses that central bankers are becoming concerned at the speed and magnitude of the recent rise in yields and may be inclined to step up their verbal intervention in the days ahead, if recent trends are to persist.

  • Treasuries: There seems to be an underlying concern that if the move upwards in Treasury yields does not abate soon, so the risks are growing of a repeat of the taper tantrum seen in 2013.

  • A bumpy March: If market technicals push yields higher and central bank comments fail to calm price action, then we could be in for another bumpy March.

  • S&P expectations: If US yields trade rapidly towards 1.75% on the 10-year, then we would not be surprised to see the S&P drop 5% or more, triggering a retrenchment in corporate bonds and emerging markets.

ECB chief economist: We're carefully watching bond yields

The ECB’s chief economist, Philip Lane, has also weighed in, saying the Bank is carefully monitoring the rise in bond yields.

Lane told Spanish business newspaper expansion Expansión that the ECB could adjust its bond-buying programme, if needed:

This is the paradox of the financial markets and the overall economy. It can be problematic if market optimism moves ahead of the current state of the economy. We are carefully monitoring the rise in yields. These questions all come into sharp focus, especially when we have a new inflation forecast. In any case, it’s important to remember that our pandemic emergency purchase programme (PEPP) will be used flexibly in response to market conditions.

But, Lane also insists the ECB won’t try to keep yields at a certain point:

“At this stage, an excessive tightening in yields would be inconsistent with fighting the pandemic shock to the inflation path.

“But at the same time, it is crystal clear that we are not engaged in yield curve control, in the sense that we want to keep a particular yield constant”.

Isabel Schnabel, executive board member of the European Central Bank, has signalled that the ECB could provide more support, if rising bond yields undermine the eurozone recovery.

In a speech in Frankfurt this morning, Schnabel pointed out that a pick-up in yields can be a positive development if it reflects improved inflation and growth expectations. But, she adds, they need to be monitored closely.

Schbabel explains:

For example, a rise in nominal yields that reflects an increase in inflation expectations is a welcome sign that the policy measures are bearing fruit. Even gradual increases in real yields may not necessarily be a cause of concern if they reflect improving growth prospects.

However, a rise in real long-term rates at the early stages of the recovery, even if reflecting improved growth prospects, may withdraw vital policy support too early and too abruptly given the still fragile state of the economy. Policy will then have to step up its level of support.

A policy of preserving favourable financing conditions includes a second element.

To ultimately empower fiscal policy as a transmission channel of monetary policy, the ECB needs to provide liquidity when risks of self-fulfilling price spirals threaten to undermine stability in the euro area as a whole.

The bond sell-off may be easing....

The yield on US 10-year Treasury bonds has dropped back from yesterday’s one-year high (meaning prices are rising).

This could improve the mood in the markets, after the heavy falls on Wall Street last night and across Asia-Pacific bourses today.

British Airways owner IAG hit by record €7.4bn loss

British Airways aircraft grounded at Heathrow Airport.
British Airways aircraft grounded at Heathrow Airport. Photograph: Adrian Dennis/AFP/Getty Images

The owner of British Airways, International Airlines Group, has reported a record €7.4bn loss for last year, and called for the introduction of digital health passes for passengers to enable the airline industry to get back on its feet.

IAG said that passenger capacity last year was only a third of 2019 and in the first quarter of this year is running at only a fifth of pre-Covid levels.

The airline group reported a total annual operating loss of €7.4bn (£6.4bn), including exceptional items relating to fuel and currency hedges, early fleet retirement and restructuring costs. It compared with a €2.6bn profit in 2019.

“Our results reflect the serious impact that Covid-19 has had on our business,” said Luis Gallego, the chief executive of IAG.

“The group continues to reduce its cost base and increase the proportion of variable costs to better match market demand. We’re transforming our business to ensure we emerge in a stronger competitive position.”

IAG’s passenger revenues plunged 75% from €22.4bn to €5.5bn last year but said its cargo business had “helped to make long-haul passenger flights viable” during the pandemic. Cargo revenues increased by almost €200m to €1.3bn and IAG also operated more than 4,000 cargo-only flights during the year.

Sterling has also been dented by the rush away from riskier assets.

The pound has dropped by three-quarters of a cent against the US dollar to $1.394, away from the three-year highs seen this week (over $1.42).

Sterling has also dropped by half a eurocent against the euro, to €1.147 (having hit a one-year high of €1.17 earlier this week).

Other currencies also came under pressure during yesterday’s bond sell-off, as Alex Kuptsikevich, FxPro senior market analyst, explains:

Rising yields in the US, European and Japanese debt markets have sharply reduced risk assets’ attractiveness.

Currencies and emerging markets were hit especially hard yesterday. Currencies such as the Mexican peso, South African rand and Turkish lira lost more than 3% intraday.

European stock markets have also begun Friday with a bump.

The Europe-wide Stoxx 600 index has dropped by almost 1.5%, with Germany’s DAX and France’s CAC both down around over 1.2%.

European stock markets, February 26 2021

The FTSE 100
The FTSE 100 in early trading Photograph: Refinitiv

FTSE 100 falls in early trading

The London stock market has opened in the red, with the blue-chip FTSE 100 index down 60 points, or 0.9%, at 6590.

Scottish Mortgage Investment Trust, which holds stakes in US tech giants, is the top Footsie faller (-2.75%), followed by online takeaway service Just Eat (-2.6%).

Oil giant BP (-2.5%) and mining group Glencore (-2%) are also dropping, as the stronger US dollar pulls down commodity prices.

John Authers: Bond market tantrum can hurt other asset classes

The big worry is that the jump in US government bond yields triggers wider turmoil in other asset classes.

Bloomberg’s John Authers has written a great piece on this overnight. He points out that the ‘tantrum’ in the bond market can have knock-on effects across the financial word.

For example, it pushes up US mortgage costs:

First, the bond market is central to setting interest rates for Americans’ mortgages. In proportionate terms, the shock to the Fannie Mae 30-year mortgage generally used as a benchmark for U.S. home loans was truly historic. Outside of one day during the worst of the 2008 crisis, and two days during the Covid shock last spring, it was the biggest percentage rise in mortgage rates on record:

It can also hurt developing economies:

Higher U.S. rates are generally held to be bad news for emerging markets, as they attract flows away from the sector, and also tend to strengthen the dollar. That in turn can weaken emerging markets that are particularly reliant on dollar-denominated debt.

And it could derail the stock market rally:

The critical question at what point bond yields become too high for stocks to bear, and cause them to fall.

The mantra for the last year, as equities have enjoyed their remarkable post-Covid rally, is that stocks remain cheap compared to bonds. This is true, but the people excitedly buying stocks on this basis might be forgetting that the situation can also be corrected by a fall for bonds, and not just by a rise for equities.

But, central banks aren’t powerless -- they can boost their existing bond-purchase programmes (quantitative easing) to pull down bond yields, if they feel financial conditions are tightening.

More here: Bond Tantrum Is a Big Test of Central Banks’ Mettle

Why rising government bond yields hurt share prices

“Bond yields rise when prices fall” is a mantra that became familiar during the eurozone debt crisis, when Greece and Italy’s borrowing costs rose to dangerous levels, triggering bailouts.

During the Covid-19 pandemic, government bond yields fell to record lows, and this week’s rises don’t imply worries about countries defaulting, of course. Instead, it’s being driven by the prospect of better economic growth, and a resulting shunt upwards in inflation.

But, if investors can get a higher rate of return for holding government bonds, it erodes the attraction of buying equities.

With bonds, you get a fixed income (the yield), and your capital back when the bonds mature (unless the lender defaults!), while shares are riskier (you might get capital growth and dividends, or the value of the shares could tumble).

Jim Reid of Deutsche Bank explains:

Yesterday proved to be nothing short of a rout in global markets, with the selloff in sovereign bonds accelerating as investors looked forward to the prospect of a strengthening economy over the coming months. Matters weren’t helped either by stronger-than-expected economic data, which only added to the fears that the Fed could withdraw stimulus sooner than anticipated, and helped Treasury yields see their biggest daily rise since March.

On top of this, there were quite obvious signs that the sharp move higher for bond yields was beginning to bite elsewhere, with US equities falling across the board and tech stocks in particular suffering big losses as investors reassessed whether current equity valuations could still be justified in a higher-yield environment.

Shane Oliver, head of investment strategy at AMP, reckons there could be a ‘more severe’ correction ahead:

“Bond yields could still go higher in the short term though as bond selling begets more bond selling.

“The longer this continues the greater the risk of a more severe correction in share markets if earnings upgrades struggle to keep up with the rise in bond yields.”

Updated

The market turmoil has been triggered by a ‘whiplash’ in bonds, says Reuters:

Asian stocks fell by the most in nine months on Friday as a rout in global bond markets sent yields flying and spooked investors amid fears the heavy losses suffered could trigger distressed selling in other assets.

In a sign the gloomy mood will reverberate across markets, European and U.S. stock futures were a sea of red. Eurostoxx 50 futures lost 1.7% while futures for Germany’s DAX and those for London’s FTSE dropped 1.3% each.

MSCI’s broadest index of Asia-Pacific shares outside Japan slid more than 3% to a one-month low, its steepest one-day percentage loss since May 2020.

For the week the index is down more than 5%, its worst weekly showing since March last year when the coronavirus pandemic had sparked fears of a global recession.

Friday’s carnage was triggered by a whiplash in bonds.

Yields on the 10-year Treasury note eased back to 1.538% from a one-year high of 1.614%, but were still up a startling 40 basis points for the month in the biggest move since 2016.

Stock markets across the Asia-Pacific region have fallen sharply today, following Wall Street’s lead overnight.

Japan’s Nikkei fell 4% to 28,966 points, Hong Kong’s Hang Seng is down around 3.4%, and Australia’s S&P/ASX 200 index has lost 2.35%.

Tai Hui, chief Asia market strategist at JPMorgan Asset Management, says (via the FT)

“With the US economic outlook boosted by pandemic improvement, vaccine distribution and the prospects of President [Joe] Biden’s fiscal package getting through the Congress, investors are now fixated on the risk of inflation and economic overheating.”

Introduction: Bond yield surge sends markets reeling

Traders on the floor of the New York Stock Exchange last night
Traders on the floor of the New York Stock Exchange last night Photograph: Courtney Crow/AP

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

World markets are roiled today as a surge in government bond yields triggered a sea of red across on Wall Street.

Sovereign bond prices fell across the board yesterday, driving up the yield (or interest rate) on the bonds. There were striking moves in the US, where the 10-year Treasury bond yield jumped to 1.5% for the first time in a year.

The bond selloff suggests investors are anticipating that the economic recovery this year will push up inflation, especially with the Biden White House planning a new $1.9trn stimulus drive.

That could force central banks to tighten monetary policy, ending the money-printing stimulus packages which have helped markets recover from last March’s crash.

Last night, the tech-centred Nasdaq plunged by 3.5% - it’s worst day since October - with the Dow sliding 1.75% from Wednesday’s record high.

Asia-Pacific markets have slumped overnight, and we’re expecting losses in Europe this morning. The FTSE 100 index of blue-chip shares in London is on track for a 1%+ fall.

One alarming thing about the selloff is that Federal Reserve chair Jerome Powell spent two days testifying to Congress this week, insisting that the Fed wasn’t about to end its stimulus.

The markets, though, are certainly edgy - ditching riskier assets and shifting back into save havens like the US dollar.

The selloff came after some encouraging US economic data - jobless claims fell last week, while durable goods orders rose by 3.5% in January. That, though, seems to have intensified worries about potential interest rate rises.

Ipek Ozkardeskaya, senior analyst at Swissquote, explains:

Investors dropped their sovereign bond holdings like a hot potato as all new piece of data pointed at improvement in economic conditions and called for rising inflation.

Equities dived along with the sovereign bonds. Nasdaq led losses with a sizeable 3.52% drop as tech stocks fell big as a result of a mass migration from growth to value stocks. Nike, Caterpillar, Johnson & Johnson and Goldman Sachs were among the rare stocks finishing the session higher. Apple, Microsoft and Disney fell, as Tesla shed 8%.

So it could be a lively day....

The agenda

  • 12.30pm GMT: Bank of England deputy governor Dave Ramsden: Speech at the Institute of Chartered Accountants in England and Wales
  • 1.30pm GMT: US Personal consumption expenditure data for January
  • 3pm GMT: University of Michigan survey of US consumer confidence

Updated

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