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Stock market rally 'petering out' on rising government bond yields

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Tom Belger
·Finance and policy reporter
·3 min read
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WATCH: Euro market rally on rising government bond yields

A global stock market rally is showing "signs of petering out," as bond yields steepened and investors' fears grew economic recovery could fuel rising inflation.

European stocks fell at the open on Wednesday after closing lower or flat the previous day, after an 11-day bull run for global stocks ended on Tuesday. Britain’s FTSE 100 (^FTSE) slid 0.5%, Germany’s DAX (^GDAXI) shed 0.7% after reaching an all-time high on Monday, and France’s CAC 40 (^FCHI) lost 0.5% after hitting its own post-pandemic high on Monday.

It came after benchmark 10-year US Treasuries hit a new one-year high, with strong economic data and signs of progress on the US government's stimulus package fuelling recovery hopes and inflation expectations. Tuesday saw the biggest daily rise in US yields since the market upheaval of last March.

The 10-year Germany government bunds also rose to their highest level since last June on Tuesday, fuelled by an investor sentiment survey hitting a five-month high and less dire-than-expected eurozone GDP declines in the fourth quarter of 2020.

New data on Wednesday also showed UK inflation ticking higher, up 0.7% in December. "This is just the start though as the roaring 20s leads to roaring inflation by the end of the year," predicted Markets.com analyst Neil Wilson.

"The astonishing equity rally we’ve seen in recent days has showed signs of petering out over the last 24 hours," wrote Deutsche Bank analyst Jim Reid in a note.

"In sovereign bond markets...the selloff continued to gather pace as investors stuck with the reflation trade, not least as Congress is increasingly focusing on the passage of stimulus now that former President Trump’s impeachment hearing is out of the way.

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"President Biden himself said 'bigger is better now' on stimulus in a town hall meeting last night."

Wilson noted "everyone's suddenly talking about" inflation. "We are witnessing a sharp sell-off in rates with yields moving aggressively higher, which could spread into trouble in other asset classes like stocks, FX and even cryptos."

He added: "I’ve expounded many times before on how the vast amount of pro-cyclical fiscal stimulus, ultra-loose monetary policy, pent-up demand and a savings glut will create a powerful inflationary impetus this year. I’ve also stressed many times that this environment, coupled with the Fed’s new average inflation targeting – which explicitly lets the economy run ‘hot’ - could lead to inflation expectations becoming unanchored, just as they did in the 1970s.

"Stocks in Europe are sliding a touch this morning after Tuesday’s pause. Concern about interest rates moving up as quickly as they are is starting to worry some investors."

Markets in China remain closed for the Lunar New Year holiday, but several leading indices elsewhere declined overnight. The Nikkei in Japan (^N225) lost 0.6%, slipping from a 30-year high. But the Hang Seng in Hong Kong (^HSI) made gains, up 1.2%.

It comes after global stocks saw their longest bull run since January 2018, with MSCI's global index rising for 11 straight sessions. It closed flat on Tuesday however, narrowly avoiding a further day of gains that would have marked the longest winning streak since 2003.

US stocks also looked set to open flat or lower. S&P 500 (ES=F) futures and Dow (YM=F) futures were trading flat as markets opened in Europe, while Nasdaq (NQ=F) futures were down 0.1%.

"Market sentiment remains underpinned by vaccination, reopening, and stimulus expectations, yet we are seeing an element of fear creep in as inflation expectations impact the potential monetary policy outlook," said Joshua Mahony, senior market analyst at IG.

"Rising bond yields provide less reason to hold stocks and precious metals, with the US dollar gaining traction as a result."

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