Stocks fall, bond yields surge as inflation and default fears compound Covid-19 worries

Weighing on equity markets were oil prices hitting their highest since Nov 2014.
Weighing on equity markets were oil prices hitting their highest since Nov 2014.PHOTO: EPA-EFE

HONG KONG (AFP, REUTERS) - Asian and European markets fell on Wednesday (Oct 6), hit by ongoing worries about rising inflation and tighter monetary policy, a possible US debt default and the Delta variant of the coronavirus.

Tokyo's Nikkei index closed 1.05 per cent lower, while Hong Kong's Hang Seng dropped 0.57 per cent and Seoul's Kospi index slid 1.82 per cent.

But Singapore, Manila, and Jakarta posted gains. Shanghai remained closed until Friday for a holiday.

London, Paris and Frankfurt were deep in negative territory in morning trade, while US futures also sank.

Weighing on equity markets were oil prices hitting their highest since November 2014, with investors anxious that spiralling energy costs could force central banks to raise rates more quickly to combat rising inflation.

US crude rose 0.4 per cent to US$79.22 a barrel, with Brent crude also climbing 0.4 per cent to US$82.87, close to a three-year top hit in the previous session.

Concerns about energy supply and a decision on Monday by producers to stick to a planned output increase rather than raising it further were behind the increases.

Inflation angst drove a sell-off in longer-dated US Treasuries and euro zone benchmark debt, and supported the dollar.

Benchmark 10-year yields rose 4.5 basis points to hit 1.573 per cent during the Asia session, having climbed nearly 11 basis points in three days. They were last at 1.5519 per cent.

Yields on 20-year and 30-year Treasuries also jumped to their highest since June.

Benchmark euro zone bond yields rose to new highs, with markets fearing inflation will be stickier than expected. Germany's 10-year yield, the benchmark of the bloc, rose to its highest since late June.

The rally enjoyed across equities for more than a year has met a roadblock in recent months as supply chain problems and a surge in energy prices caused by a recovery in demand have led to a sustained spike in inflation.

And investors are not happy, with some now warning that continuously high prices combined with signs that global growth is slowing could lead to a period of stagflation.

The United States Federal Reserve is widely expected to soon announce that it will begin cutting back its massive bond-buying programme, with interest rates possibly rising as soon as next year.

Other central banks have also hinted at moves soon or have already acted.

On Wednesday, the Reserve Bank of New Zealand announced its first rate rise in seven years, joining the banks of South Korea and Norway.

US credit rating warning

There were warnings of more market fluctuations to come.

"For the last five or six months we've entered a period of... a mini-cycle in the US where you've got a changing Fed regime, and we are at the extended end of a recovery," Mr Kieran Calder of Union Bancaire Privee told Bloomberg Television.

"It leaves the market vulnerable to external shocks and increased volatility."

Democratic Senate leader Chuck Schumer warned of a US credit rating downgrade if lawmakers fail to raise the debt ceiling, with the country in danger of a catastrophic default.

"Unfortunately, sadly and confoundingly, too many Republicans seem proud of this moment where they're pushing us to the edge of default and possible downgrade," Mr Schumer told a news conference.

The crisis at Chinese developer China Evergrande Group continues to cast a shadow as the firm drowns in a sea of debt worth more than US$300 billion (S$409 billion) and struggles to find the money to stay afloat.

While many observers have said they do not see the issue causing a major threat to the global economy, the potential impact its collapse could have on China's crucial property sector is still a huge cause for concern.

"Evergrande is a long way from being contained, quite the opposite, in fact," warned Oanda's Mr Craig Erlam.

"Trading remains suspended on Evergrande's shares, while other developers are now falling victim to the crunch... This is only starting to unravel."