World stocks were flat on Wednesday just above eight-week lows, dampened by US long-dated borrowing costs near multi-year peaks, renewed fears for the global economy and the possibility of an Italy-EU clash over budget spending.
The effects on world markets of this week’s bond selloff that took US 10-year bond yields to seven-year highs were worsened by economic growth worries stemming from trade conflicts and $80 per barrel oil, as the International Monetary Fund slashed its world GDP forecasts for the first time in two years.
The IMF’s estimates for the United States and China were both diminished, with the fund predicting the countries would feel the effects of their trade war next year. It has also cut 2019 forecasts for emerging markets.
MSCI’s world equity index, which has treaded the last four days in the red, was flat. While most Asian markets increased, European shares declined 0.2 percent as the technology and luxury sectors were hit by US tech weakness and fears of a Chinese economics slowdown.
Wall Street futures indicated a flat opening for the S&P 500, while the tech-heavy NASDAQ was tipped to fall.
“We are seeing more investors opting to wait and see how risks surrounding rising US Treasury yields, global growth, and China play out,” Jasper Lawler of London Capital Group. “Near-term risks to global financial stability have increased rapidly over the past few months. The markets have been relatively complacent, but we are starting to see an acknowledgement of these risks.”
Meanwhile, in China, the yuan slipped against the dollar for the fifth session out of the past six to approach four-year troughs that were reached in August.
The focus is on the next week’s semi-annual US report on currencies that, many believe, could accuse Beijing of manipulating the yuan depreciation.
Stocks have been shaken this week by a solid selloff on US Treasuries where 10-year borrowing costs reached a seven and a half peak of 3.261 percent. Yield stand off those levels but increased 2 basis points on the day to 3.23 percent.
“We are at some sort of critical moment, a crossroads, for bond and equity markets,” said Marie Owens Thomsen, who is the global head of economic research at Indosuez Wealth management.
US 10-year yields at 2 percent unequivocally favor equity investment but this is not the case above 3 percent, she said.
“This January we took out the 2 percent (yield) handle and now we are wondering if we are permanently taking out the 3 percent handle as well. That makes the climate for equities much more challenging.”
Owens Thomsen cautioned, however, that deceleration in economic growth could curb the rise in yields. The Treasury selloff may have paused also after President Donald Trump complained that the Federal Reserve was going too fast with rate spikes.
Meanwhile, in Europe, there has been more bellicose rhetoric from Italian politicians, many of whom seem to be girding for battle with European Union authorities after unveiling a bigger-than-expected budget deficit.