Vicious selloff in sovereign bonds spooks Asia stock markets, commodities surge

A pedestrian looking at an electronic board showing the stock market indices of various countries outside a brokerage in Tokyo on April 9, 2015. Asian stocks stumbled on Wednesday in sympathy with weak US and European markets as equities investors we
A pedestrian looking at an electronic board showing the stock market indices of various countries outside a brokerage in Tokyo on April 9, 2015. Asian stocks stumbled on Wednesday in sympathy with weak US and European markets as equities investors were spooked by a vicious selloff in sovereign bonds globally. -- PHOTO: REUTERS

SYDNEY (Reuters) - Asian stocks stumbled on Wednesday in sympathy with weak U.S. and European markets as equities investors were spooked by a vicious selloff in sovereign bonds globally.

The sudden spike in bond yields is being mirrored by an equally rapid rally in resources to suggest investors are becoming less concerned about the danger of deflation.

MSCI's broadest index of Asia-Pacific shares outside Japan was off 0.4 per cent in early trade, led by a 1.2 per cent decline in Australia.

The Straits Times Index was down 0.54 per cent at 3,452.39 at around 9:15am.

Dealers were uncertain if this was just a temporary correction of very crowded positions or a turning point toward a more reflationary world, but evidence for the latter was starting to pile up.

A broad bounce in commodities saw oil and copper prices speed to their highest for the year so far, while zinc reached ground not trod in eight months.

Brent crude has climbed almost 50 per cent from its January trough to reach US$67.66 a barrel, with U.S. crude not far behind at US$60.71.

In just four sessions yields on 10-year German paper had tripled to 0.517 per cent and erased all the gains made this year. On Tuesday alone, Italian, Spanish and Portuguese yields all rose between 27 and 30 basis points.

The U.S. 10-year Treasury yield touched a two-month top at 2.20 per cent having climbed from 1.92 per cent in little more than a week.

Thirty-year paper suffered even more as investors all but went on a buying strike to protest the paltry returns paid by such long-dated debt.

With yield up, equities have faltered.

The Dow ended Tuesday down 0.79 per cent, while the S&P 500 lost 1.18 per cent, and the Nasdaq 1.55 per cent. The pan-European FTSEurofirst 300 equity index shed 1.6 per cent.

Commodity currencies benefited from the rebound in resource prices, with the Australian dollar the best performer. The Aussie rose more than 1 per cent to US$0.7955 and was last at US$0.7935.

It was already on the rise on Tuesday after the Reserve Bank of Australia gave no clear signs that it will ease again, having cut its cash rate to a record low 2.0 per cent.

The U.S. dollar was less lucky as an unexpectedly sharp widening in the U.S. trade deficit suggested the economy may have shrunk in the first quarter.

The U.S. dollar index fell as far as 94.877, retreating from a one-week high of 95.946. It last stood at 95.160.

Against the yen, the greenback eased to 119.90 from a 3-1/2 week high of 120.51. The euro rebounded to $1.1183, from Tuesday's low of $1.1066.

The next focus in Asia will be a private survey of China's services sector due at 9:45am Singapore time. With the market worried about slowing Chinese manufacturing activity, any weakness will only add to expectations for more stimulus.

Later in the day, Federal Reserve Chair Janet Yellen is scheduled to speak and markets will be super sensitive to any guidance on the outlook for the first hike in interest rates.