World stock markets remain fragile
london — World stock markets remained on shaky ground on Thursday as US bond yields crept back towards four-year highs after US congressional leaders reached a two-year budget deal to raise government spending by almost $300 billion.
While the deal was a rare display of bipartisanship that should stave off a government shutdown, it looks set to widen the US federal deficit further and could fan inflation — prompting the Federal Reserve to lift interest rates faster.
The Bank of England meets later in the day and is expected to say that another rate increase could be nearing as Britain’s economy grows faster than expected.
European stock markets opened the day lower, with blue-chip indexes in Frankfurt, Paris and London down 0.3-0.7 per cent.
MSCI’s broadest index of AsiaPacific shares outside Japan ticked up 0.1 per cent, but remained near six-week lows hit earlier this week amid a rout in world stocks.
In China, Shanghai’s benchmark index hit a six-month low, even as data showed the country’s trade performance in January had exceeded expectations. Investors remained wary after an aggressive selloff in equities in the past week on worries about the prospects of rising interest rates, which would shut off the liquidity spigot that has fed an exuberant rally in riskier assets.
Still, US stock futures traded higher , pointing to a firm opening for Wall Street shares after the US budget deal.
“The scale of increase in spending was much larger than what markets were expecting just a few months ago. It will have as big an impact as tax cuts,” said Tomoaki Shishido, fixed income analyst at Nomura Securities.
The Cboe Volatility Index, known as the VIX and often seen as investors’ “fear gauge”, fell 2.3 points to 27.73, but that was still more than twice the levels generally seen in the past few months.
Combined with an expected economic boost from President Donald
The scale of increase in spending... will have as big an impact as tax cuts Tomoaki Shishido, fixed income analyst at Nomura Securities
Trump’s planned tax cuts, the increased deficit spending could overheat already strong US growth and accelerate inflation to levels not seen over a decade.
Such fears drove the 10-year US Treasury yield back up to 2.84 per cent, near Monday’s four-year peak of 2.885 per cent. In Europe, bond yields were also higher, with the prospect of increased fiscal spending after Wednesday’s coalition government deal in Germany adding to some upward pressure on yields.
In currency markets, sterling was a touch weaker at $1.3865 , not far from Tuesday’s two-week low of $1.3838, ahead of a Bank of England meeting.
At 0942GMT it stood at 90.554, up 0.33 per cent on the day. Europe’s single currency dipped to $1.2231, its lowest level in more than two weeks, while the dollar was 0.3 per cent firmer at ¥109.66. —