Stocks drop with German bonds

More than $2tr wiped out from global markets in less than two weeks

Stocks declined around the world and bonds fell in Germany and France, extending losses that erased more than $2 trillion from global markets in less than two weeks. Precious metals retreated while corporate bond risk rose to the highest level this year.

The MSCI All-Country World Index dropped 0.6 per cent at 7:05am in New York, and Standard & Poor’s 500 Index futures slid 0.5 per cent. German 10-year bund yields jumped 10 basis points to 0.68 per cent. Treasuries erased earlier losses, leaving the 10-year rate little changed at 2.24 per cent. The cost of insuring European corporate debt against default increased to as much as 67 basis points, the highest since December 16. India’s rupee and Thailand’s baht led emerging-market currencies lower. Chinese shares capped their biggest three-day decline in almost two years. Gold and silver fell at least 0.7 per cent.

Growth prospects

Global equities have declined after their value reached a record $72 trillion on April 27 and about $436 billion has been erased from global bonds as China’s economy slowed and investors assessed growth prospects in the US and the outlook for higher interest rates. A 51 per cent rally in Brent crude since mid-January is adding to signs of inflation.

“The move is brutal, but that’s partly because the market was less liquid,” said Richard McGuire, head of European rates strategy at Rabobank International in London. “A shift in sentiment and fundamentals may have triggered it. But price action suggested valuations in bond markets were at extreme levels.”

The yield on 10-year French bonds climbed 16 basis points to 1.07 per cent. Italian bonds rebounded, with the rate dropping seven basis points to 1.85 per cent. Implied option volatility on German 10-year bund futures contracts surged in the past week to the highest since August 2012, data compiled by Bloomberg showed.

Poland scrapped an auction of local-currency bonds, citing adverse conditions.

The euro advanced against 12 of its 16 major counterparts, strengthening 0.3 per cent to $1.1375.

The average yield for investment-grade corporate bonds in euros climbed to 1.11 per cent from a record low of 0.85 per cent in March, according to Bank of America Merrill Lynch Index data.

Federal Reserve Chair Janet Yellen said Wednesday that long-term rates are low and could jump when the central bank raises its benchmark.