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eacting to surging global bond yields.
Friday’s equity markets rout is likely to extend as the futures of the US stock indices are
indicating.
However, there isn’t much to worry about because corporate profits are still rising and
chances of US recession are remote. So this may only be a healthy pullback which the
investors have been waiting for some time. A 10% correction could take place as this was
long overdue. In other words, the long-term momentum for the equity markets is only easing
off as these markets have been defying the Newton Law of Gravity.
8.18am GMT
Investors in London are playing catch-up after Friday afternoon’s sharp selloff on Wall Street
(which accelerated after UK traders had gone home for the weekend).
Jasper Lawler of CMC Markets explains:
The next day after an unusually big sell-off is always a big test of a market’s strength. A
repeat of anything close to the 2% decline seen in US indices on Friday could trigger a
prolonged period of risk-off sentiment. Last week the S&P 500 dropped -3.8%, with the
energy sector leading the declines.
After gains of 6% in January, the first few days of February were always going to be at risk
of profit taking.
8.07am GMT
FTSE 100 hits eight-week low
And we’re off!
Trading is underway in the City, and there are losses across the board as investors join the
global sell-off .
Britain’s FTSE 100 has shed 80 points, or 1.1%, taking the blue-chip index down to 7360
points. That’s its lowest level since 8th December.
The FTSE 100 over the last three months Photograph: Thomson Reuters
Updated at 8.08am GMT
7.57am GMT
Shane Oliver, chief economist at AMP Capital, reckons that the markets could suffer a 10%
fall - but not a full-blown crash.
He writes:
He past week has seen shares come under pressure as Fed rate hike expectations
increased, partly reflecting an acceleration in US wages growth, and the bond yield rose
sharply. From their recent high, US shares have fallen 3.9% making it the deepest pullback
since a 4.8% fall prior to the November 2016 US election. It’s likely the pullback has further
to go as investors adjusts to more Fed tightening than currently assumed – we see four (or
possibly five) Fed rate hikes this year against market expectations for three - and higher
bond yields.
This will impact most major share markets, including the Australian share market which is
vulnerable given its high exposure to yield plays like real estate investment trusts and
utilities. However, the pullback is likely to be just an overdue correction (with say a 10% or
so fall) rather than a severe bear market – providing the rise in bond yields is not too abrupt
and recession is not imminent in the US with profits continuing to rise. So the two key
questions are how severe the back up in bond yields will be and whether a recession is
approaching?
Oliver's Insights: Correction time for shares? Following from last week’s pullback, here’s a
note on market implications: https://t.co/0ZhChqthOG
— Shane Oliver (@ShaneOliverAMP) February 5, 2018
7.55am GMT
Bonds are falling
Government bonds are falling in early trading, extending their recent losses.
The yield, or interest rate, on German 10-year bonds has hit its highest level since
September 2015. It’s still low in historical terms, at just 0.77%, but it shows that prices have
hit their lowest in almost two and a half years.
Bonds are being hit by worries about rising inflation, which would put pressure on central
banks to raise interest rates.
US government debt (Treasury bills) have weakened sharply - pushing the yield on 10-year