Global equities and government debt prices remained under pressure on Friday, after Federal Reserve chairman Jay Powell provided scant detail on how he would address the recent bond market rout.
Bond prices have been sliding in the opening weeks of this year, in a move that has accelerated in the past two weeks. Some analysts and investors had expected Powell to use his slot at an event hosted by the Wall Street Journal on Thursday to lend some support to the market, perhaps even signalling a willingness to formally hold yields down.
Instead, while he said the recent pick-up in yields — the flip side of falling prices — was “notable”, and that the US central bank would be “patient” in the face of a temporary rise in inflation, he gave no sense of immediate alarm. Yields on 10-year US Treasuries jumped 0.07 percentage points to 1.55 per cent on Thursday and continued to rise on Friday.
“It looks like words are not enough,” said Joost van Leenders, senior investment strategist at Kempen Capital Management. “There’s still a lot of unrest with rising yields . . . historically rising yields aren’t bad for equities, the reason why it’s different this time is a lot of equities have high valuations, which are justified by low yields.”
Some analysts expect bond prices to continue falling unless Powell intervenes. “With the Fed, crucially, not yet showing signs of being intimidated by the bond market, the sell-off in rates risks extending,” said Ralf Preusser, global head of rates research at Bank of America Merrill Lynch.
In Europe, the region-wide Stoxx 600 index fell 0.2 per cent at lunchtime, while London’s FTSE 100 benchmark climbed 0.5 per cent and Frankfurt’s Xetra Dax lost 0.5 per cent.
In Asia, China’s CSI 300 index of Shanghai- and Shenzhen-listed stocks dropped as much as 2 per cent during its session, before closing down 0.3 per cent after Beijing set a target of “above 6 per cent” for economic growth in 2021.
China’s premier Li Keqiang hailed the country’s recovery from an “extraordinary” year and said the government wanted to create at least 11m urban jobs at a meeting of the National People’s Congress, the annual gathering of the country’s rubber-stamp parliament.
“A target of over 6 per cent will enable all of us to devote full energy to promoting reform, innovation and high-quality development,” Li said, adding that Beijing would “sustain healthy economic growth” as it kicked off its new five-year plan.
Analysts were less sanguine on China’s economic outlook, pointing to the markedly lower growth target relative to recent years.
“There is, in fact, not much surprise from the government work report except for the super-low GDP [gross domestic product] target,” said Iris Pang, chief economist for Greater China at ING, who estimated growth would be 7 per cent this year. “This makes me feel uneasy as I don’t know what exactly the government wants to tell us about the recovery path it expects.”
The S&P 500, which closed down 1.3 per cent on Thursday, was tipped by futures markets to rise 0.1 per cent when trading begins on Wall Street.
Brent crude, the international benchmark, rose more than 2 per cent to $68.48 a barrel, a day after Opec and its allies decides against introducing large increases to their output. “The strong performance in commodities suggests that it is one asset class where investors have moved,” said van Leenders.