[1/3] The graphic of the German share index DAX is pictured on June 5, 2023 at the Frankfurt Stock Exchange. Portal/Staff
- European stocks are crawling out of the red
- Bond markets reassess interest rate expectations after Canada surprise
- The Turkish lira is stabilizing after falling 7% on Wednesday
LONDON, June 8 (Portal) – Borrowing costs in government bond markets rose and equity markets faltered on Thursday after a surprise interest rate hike in Canada reminded investors for the second time this week that the rise in global interest rates is yet to come is not over.
Asian markets struggled overnight and cautious sentiment continued in Europe as London’s FTSE (.FTSE), Germany’s DAX (.GADXI) and France’s CAC40 (.FCHI) gradually climbed higher after starting in the red .
Traders have been buoyed by a sweeping reassessment of bond markets as to when and where interest rates are likely to peak across the world’s largest economies.
In a nearly identical copy of Australia’s surprise rate hike this week, Canada surprised markets on Wednesday by raising interest rates to a 22-year high of 4.75% on the back of an overheated economy and stubbornly high inflation.
US 10-year Treasury yields, the benchmark for global borrowing costs, were back above 3.8%, while in Europe, German 2-year yields topped 3% for the first time since March, albeit briefly .
“The main theme with everything out there is the bond sell-off and the realization that the pause (in central bank rate-hiking cycles) is not the end,” said Société-Generale strategist Kit Jukes.
“We’re definitely rating rate expectations higher,” he added, noting that traders are now also questioning long-held views that the US Federal Reserve would end its cycle of tightening long before the European Central Bank.
The Fed, ECB and Bank of Japan will make their interest rate decisions next week.
Tapas Strickland, head of market economics at NAB, said the moves by the BoC and RBA mean Tuesday’s US inflation data will determine whether the Fed hikes rates this month or skips a move as widely expected.
The dollar fell slightly on Thursday but remained close to its three-month high after gaining more than 2.5% against the world’s other top currencies over the past month.
Markets are now pricing in a 64% chance that the Fed will hold tight next week, down from 78% just a day earlier, the CME FedWatch tool showed. However, traders are broadly expecting a 25 basis point hike in July.
“The view here was that if both Australia and Canada felt the need for further rate hikes, then in all likelihood the Fed would, too,” said Chris Turner, market head at ING.
TRYING TIMES
In Asia, both Chinese stocks (.SSEC) and Hong Kong’s Hang Seng Index (.HSI) were down again overnight, still feeling the effects of Wednesday’s slump in export data — down 7.5% on a year-to-year basis and the sharpest drop since January .
“The weak export numbers will prompt observers to look for a new round of policy stimulus,” Saxo Markets strategists said.
The yen appreciated 0.2% to 139.80 per dollar after revised data showed Japan’s economy grew faster than initially thought in January and March.
The dollar index, which measures the US currency against six major currencies, fell 0.1% in European trading. The euro rose 0.15% to $1.0717 as the Canadian dollar consolidated gains following the BoC’s surprise rate hike.
Among commodities, US crude futures fell 0.25% to $72.37 a barrel and Brent traded at $76.76, down 0.25% on the day.
Gold prices stabilized after falling 1% in the previous session, with spot gold prices up 0.3% to $1,945.89 an ounce.
In emerging markets, the Turkish lira hit another record low. Signs that Tayyip Erdogan’s newly elected government is abandoning its 18-month strategy of keeping the currency on a tight leash caused the lira to plunge 7% on Wednesday.
“The thing is that it (the lira) has been kept artificially stable for so long in the run-up to the elections,” said Erik Meyersson, SEB’s chief emerging market strategist, also citing ongoing questions about Turkey’s economic policy.
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Additional reporting by Ankur Banerjee in Singapore; Edited by Toby Chopra
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