Borrowing costs in government bond markets rose and share markets stalled on Thursday after a surprise interest rate hike in Canada gave investors their second reminder of the week that the surge in global interest rates isn’t done yet.
Asian markets had struggled overnight and the cautious mood continued in Europe as London’s FTSE (.FTSE), Germany’s DAX (.GADXI) and the France’s CAC40 (.FCHI) gradually crawled higher after starting off in the red.
Traders were being driven by a broad repricing going on in the bond markets of when and where interest rates in the world’s biggest economies are likely to max out.
In an almost carbon copy of a surprise rate rise in Australia this week, Canada caught markets off guard on Wednesday by hiking its interest rates to a 22-year high of 4.75% due to an overheating economy and stubbornly high inflation.
U.S. 10-year Treasury yields, the benchmark for global borrowing costs, was back over 3.8% again , while in Europe Germany’s 2-year yields topped 3% for the first time since March, albeit briefly.
“The main theme to everything out there is the bond selloff and the realisation that the pause (in the rate hiking cycles of central banks) doesn’t mean the end,” said Societe Generale strategist Kit Jukes.
“We are definitely repricing rate expectations higher,” he added, explaining that traders were also now questioning the long-held view that the U.S. Federal Reserve would end its rate hike cycle well before the European Central Bank.
The Fed, ECB and Bank of Japan all have interest rate decisions next week.
Tapas Strickland, head of market economics at NAB, said the steps from BoC and RBA meant U.S. inflation data on Tuesday will be pivotal for whether the Fed hikes this month or skips a move as widely expected.
The dollar fell slightly on Thursday but remained near to a three-month high following a more than 2.5% rise against the world’s other top currencies over the last month.
Markets are now pricing in a 64% chance of the Fed standing pat next week, compared with 78% just a day earlier, the CME FedWatch tool showed. Traders are largely expecting a 25 basis point hike in July though.
“The view here was that if both Australia and Canada felt the need for further hikes, in all probability the Fed would too,” said Chris Turner, head of markets at ING.
TRYING TIMES
Overnight in Asia, Chinese shares (.SSEC) and Hong Kong’s Hang Seng Index (.HSI) had both dipped again still feeling the effects of Wednesday’s slump in exports data – a 7.5% year-on-year drop and the biggest decline since January.
“The weak export numbers will have observers looking for a new round of policy stimulus,” Saxo Markets strategists said.
The yen strengthened 0.2% to 139.80 per dollar after revised data there showed Japan’s economy grew more than initially thought in January-March.
The dollar index , which measures the U.S. currency against six major peers, was down 0.1% in European trading. The euro was up 0.15% to $1.0717 while the Canadian dollar was consolidating the gains made after the BoC’s surprise hike.
Among commodities, U.S. crude futures fell 0.25% to $72.37 per barrel and Brent was at $76.76, down 0.25% on the day.
Gold prices steadied following a 1% drop in the previous session, with spot gold up 0.3% at $1,945.89 an ounce.
In emerging markets, Turkey’s lira , hit another record low. Signs Tayyip Erdogan’s newly re-elected government is abandoning an 18-month strategy of keeping the currency on a tight leash saw the lira nosedive 7% on Wednesday.
“The thing is is that it (the lira) has been held artificially stable for so long in the lead up to the elections,” SEB’s Chief Emerging Markets Strategist, Erik Meyersson, said also pointing to the ongoing questions over Turkey’s economic policies.
