Global sell-off raises turbulence fears. Jun 21, 2013. By Ralph Atkins in London and Michael Mackenzie in New York An abrupt global sell-off in equities, bonds and commodities on Thursday has fuelled fears that the world is entering a fresh phase of financial turbulence as the US Federal Reserve prepares to ease its large-scale asset purchases. Emerging markets were among the worst hit in volatile trading after Ben Bernanke, Fed chairman, on Wednesday set out the case for slowing the pace of QE3 this year as the US economy picks up momentum. As the dollar strengthened, gold prices tumbled by as much as 4.8 per cent to a two-and-a-half-year low. Oil fell 3.3 per cent. Yields on 10-year US Treasuries, which move inversely with prices, hit 2.47 per cent at one point – up from a low of 1.61 per cent in early May – although a steep fall in US equity prices later encouraged a move back into government debt. Thursday’s sell-off threw firmly into reverse the rally earlier this year triggered by Japan’s aggressive action to drag its economy out of deflation. “The mood was exuberant in May after the Bank of Japan started to print money but with the Fed heading the other way everyone is suddenly very twitchy,” said Trevor Greetham, director of asset allocation at Fidelity. John Brady, managing director of interest rate sales at RJ O’Brien, said: “The risk here is that the market’s reaction is now out of the Fed’s hands – emerging market and carry trades globally are being unwound.” The nervousness was exacerbated by an escalating credit crunch in China, where short-term money rates soared to all-time highs. The FTSE Emerging markets index tumbled 4.2 per cent on Thursday – the deepest one-day slide since September 2011. The EMBI Global Diversified index of international developing country bonds fell 1.4 per cent to its lowest level since June last year and has lost almost 8 per cent since early May. The Indian rupee and Turkish lira plunged to record lows against the dollar. “Risk assets are very vulnerable, and the situation in China is not positive for near-term global growth prospects,” said John Briggs, strategist at RBS Securities. In Europe, the FTSE 100 tumbled nearly 3 per cent – also the biggest daily fall since September 2011. German 10-year Bund yields have risen in line with US Treasury yields, to reach 1.665 per cent – compared with just 1.2 per cent less than two months ago. Yields on crisis-hit southern European countries rose even more sharply – threatening further economic damage. “Europe is absolutely not ready to have higher interest rates. It has a different dynamic to the US,” said Nick Nelson, global equity strategist at UBS. US interest rate markets priced in a higher chance of rate increases starting in September and December 2014 – at odds with the majority of Fed officials who expect the first official tightening of interest rates in 2015. By lunchtime on Thursday, the S&P 500 was down 1.4 per cent. But analysts said equities would benefit if the Fed’s optimism about the pace of the economic recovery proved right – and Thursday’s sell-off might lead to a healthy correction. “The Fed has created uncertainty and that is going to keep markets volatile. I’m not so sure that is a bad thing because people were getting complacent. A bit of summer volatility is not a bad thing,” said Andrew Parry, chief executive of Hermes Sourcecap.
Posted on: Fri, 21 Jun 2013 02:20:05 +0000
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