European stocks delved into the red on Friday, continuing the global sell-off, after Bank of England (BoE) economist Andy Haldane cautioned that an inflationary “tiger” had awoken.
UK bond yields rose as Haldane commented that inflation may become difficult to tame.
“The combined effects of unprecedentedly large shocks, and unprecedentedly high degrees of policy support, have stirred it from its slumber. In this environment, the tiger-taming act facing central banks is a difficult and dangerous one,” he said.
“People are right to caution about the risks of central banks acting too conservatively by tightening policy prematurely. But, for me, the greater risk at present is of central bank complacency allowing the inflationary (big) cat out of the bag.”
It came after declines on Wall Street on Thursday amid a sharp spike in government bond yields in the last 24 hours, with investors adopting a risk-off approach.
The pound was also under pressure on Friday, falling back below $1.40, as traders turned to safer assets such as the dollar, which strengthened.
Sterling slipped to $1.3946 against the dollar (GBPUSD=X), down from the three-year highs of $1.42 seen earlier in the week, while it dipped half a eurocent against the euro (GBPEUR=X) to €1.1474. The currency hit a high of €1.17 during the week.
Neil Wilson of Markets.com said: "You can get 1.6% risk free from a 10-year note now – real rates are the key here – the 30-year has flipped positive and 20-year now too, pretty much. Real rates are important since they reflect inflation expectations too – if the real rate of return on government bonds is minus it draws flows into anything that offers growth in the future.
He adds: "Higher rates now eat into the future earnings for growth companies. But they should mean that we are in cyclical recovery that is good for cyclical stocks – so this not just a straight risk off selloff, but rotations into assets that are more appealing right now."
US equities fell across the board on Thursday and tech stocks in particular suffered big losses as investors reassessed whether current equity valuations could still be justified in a higher-yield environment.
Markets were hedging the risk of an earlier rate hike from the Federal Reserve, despite officials vowing earlier in the week that any move was long in the future.
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“Yesterday proved to be nothing short of a rout in global markets, with the selloff in sovereign bonds accelerating as investors looked forward to the prospect of a strengthening economy over the coming months,” Deutsche Bank Research said.
“Matters weren’t helped either by stronger-than-expected economic data, which only added to the fears that the Fed could withdraw stimulus sooner than anticipated, and helped Treasury yields see their biggest daily rise since March.”
Asian stocks fell to one-month lows on Friday as a rout in global bond markets sent yields flying and spooked traders amid fears the deep losses could trigger distressed selling in other assets.
MSCI's broadest index of Asia-Pacific shares outside Japan slid 2.4pc to a one-month low, while Japan's Nikkei (^N225) shed 3.99%. Chinese blue chips joined the retreat, with the Hang Seng (^HSI) dropping 3.41% and the Shanghai Composite (000001.SS) dipping 2.12%.
“As we come to the end of the month, we’ve seen some staggering gains in commodity prices, with copper (HG=F) on course for its biggest monthly gain since April 2006, while long term bond yields have also shot up sharply, as the economic recovery story lends itself into a narrative of higher prices, and possible rate hikes,” Michael Hewson at CMC Markets said.
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