Equities creep to 5-week highs, ignore bond selloff

[LONDON] World stocks climbed to 5-week highs on Wednesday as investors ignored a broadening selloff in global bond markets fuelled by a combination of soaring inflation and hawkish comments from US policymakers.

Two-year US Treasury yields are up 70 bps so far in March and set for their biggest monthly jump since 2004.

But investors have been relatively sanguine about the implications of higher yields on stock market valuations, with many choosing to buy back in after a bruising few months for equity prices.

MSCI's broadest gauge of world stocks rose 0.2 per cent to a Feb 17 high, a level last seen days before Russia invaded Ukraine. An Asian gauge rose 0.7 per cent to its highest since early March.

European stocks also gained, with a pan-European equity benchmark hitting a new 1-month high in early London trading before they fell back as traders took profits.

"It is almost as if the negative impacts of inflation, rising interest rates and the uncertainties of war are no longer of concern," said Stuart Cole, head macro economist at Equiti Capital, who added that investors were focusing on stocks that could withstand the high inflationary environment.

Technology shares, which have had an inverse correlation with higher interest rates in the past, were the biggest drivers of broader market gains, with a Hong Kong gauge of technology stocks rising to a three-week high.

In Asia, battered e-commerce giant Alibaba, which recently expanded a buyback programme, rose 6.7 per cent and in Tokyo out-of-favour tech investment firm SoftBank Group rose 7.2 per cent to its highest since Feb 10.

The main US tech index ended up 2 per cent overnight, cutting its year-to-date losses to 10 per cent from 20 per cent earlier this month.

Some previously solidly bullish investors, however, are worried about the impact of rising interest rates on the outlook for stocks.

"Although there is widespread criticism, it's too early to take the view that the Fed won't be able to negotiate the fine line of reducing inflation without derailing growth," said Mark Haefele, chief investment officer, UBS Global Wealth Management.

"Given a higher degree of uncertainty, rather than make a directional play on stocks moving higher, we prefer selected overweight and underweight positions, yielding an overall neutral allocation to equities."

The most eye-catching moves recently have been in the bond market, although there was some calm on Wednesday. 2-year US yields dipped from a 6-year high.

The sharp rise in short-dated yields has flattened the gap between 2 and 10-year US yields to its lowest levels since the coronavirus pandemic hit global markets in March 2020. An inverted yield curve is widely seen as a predictor for future US recessions.

The selloff in short-dated yields prompted fed fund futures to price in an aggressive 190 bps through the remainder of the year after a 25 bps rate hike last week. Futures were nearly pricing in the probability of a 50 bps hike in May.

The selloff in US markets has reverberated elsewhere with German and British bond yields climbing this week, although they too fell back slightly on Wednesday.

British inflation data on Wednesday showed prices rising to a new 30-year high of 6.2 per cent last month versus a year ago - higher than economist expectations - although yields were unmoved.

Currency market activity continued to be relatively subdued, confirming the lack of any clear directional trends.

Against the US dollar, the Japanese yen was down by 1130 GMT but held below 121 yen after Bank of Japan Governor Haruhiko Kuroda said it was premature to debate the exit from ultra-loose monetary policy.

The euro dropped 0.5 per cent to US$1.0981 while sterling was nearly half a per cent weaker against a broadly stronger dollar.

Commodity prices, sent soaring by anticipated supply disruptions from the war in Ukraine, rose again against a lack of tangible progress toward peace.

Oil rallied. Brent crude futures rose 2.45 per cent to US$118.31 a barrel and US crude climbed 2.15 per cent to US$111.62.

Grain prices, which have jumped since Russia invaded Ukraine in late February, remained supported by supply concerns, especially for delivery later in the year. REUTERS