On Tuesday, soaring stocks stalled and high-flying currencies such as the euro and Australian dollar lost altitude, as a weeks-long risk rally hit turbulence.
Asian equities however had scored their ninth day of gains after landmark highs by Wall Street on Monday, however Europe’s big markets opened with a lurch and were 1.1% in the red by the time a bumpy U.S. restart loomed.
The euro dipped 0.2% in its second drop in the past 11 days and safe bonds were back in favour, while another barb from China, in its spat with Canberra, saw the Australian dollar drop by 1%, having only just set a 10-month high.
“It fells like the FX market is looking at the equity market and thinking perhaps we should position for a correction,” said Societe Generale strategist Kit Juckes, referring to the recent surge in global equity markets.
“It is going to depend on what the U.S. market does today as we have the FOMC (U.S. Federal Reserve policy announcement) tomorrow … but why wouldn’t you buy some yen at this point?”
The optimism for equity markets came last week after U.S. jobs data showed a sharp decline in the unemployment rate. Wall Street indices surged, with the Nasdaq closing at a record level on Monday.
Global markets were mauled in March amid concern over both the short- and longer-term damage to the world economy from the COVID-19 pandemic. But many indices are now back to pre-COVID-19 levels.
MSCI Asia ex-Japan’s overnight advance had set its longest winning streak since early 2018. The 49-country world index is up nearly 45% from 4-year lows struck in mid-March.
“The good news is that this shows central banks’ effort to stabilise the market have worked,” said Tai Hui, chief Asia market strategist at J.P. Morgan Asset Management.
Nevertheless, fears of renewed trade tensions between the United States and China and the second-round impact from higher unemployment and bankruptcies are hanging over the outlook.
In its latest Global Economic Prospects report on Monday, the World Bank said advanced economies are expected to shrink 7.0% in 2020, while emerging-market economies will contract 2.5%, their first slump since aggregate data became available in 1960.
On a per-capita gross domestic product basis, the global contraction will be the deepest since 1945-46, when World War Two spending dried up.
BEARS BITE BACK
Tuesday’s wobble in markets saw the safe-haven Japanese yen head as high as 107.93, while the U.S. dollar’s gains elsewhere saw the greenback index make its best spurt since May 22.
Big emerging market currencies such as China’s internationally traded yuan, Brazil’s real and Turkey’s lira backpedalled, while Europe’s stocks were led down by a 3% drop in eurozone bank shares after a six-day run of gains.
The mood shifted in commodity markets, too. Oil prices slipped over 1% in London after Brent had hit its highest in more than three months at $41 a barrel. Gold flipped higher as industrial metals copper, nickel and aluminum all fell.
“While OPEC+’s historic agreement was extended, Gulf nations’ extra voluntary production cut — a massive 1.2m bpd according to Prince Abdulaziz bin Salman — will also end this month,” said commodity strategists at TD Securities.
Written by Marc Jones