As expected, the FTSE 100 started the day on the back foot. Luckily London didn’t see the blood-letting that hit Wall Street as bond yields advanced on inflation fears.
The index fell 34 points in the early exchanges to 6,618.46 as some home-grown optimism over the vaccine roll-out and economic rebound helped mitigate the knock-on impact of America’s retrenchment.
“The tantrum in the bond market has inevitably spilled over into equities as the spectre of inflation increases,” said Richard Hunter, head of markets at Interactive Investor.
“Despite the soothing noises of the Federal Reserve, the repricing of inflation expectations is of concern.
“With excessive liquidity in the system and with the likelihood of a major release of pent-up demand as pandemic restrictions ease, inflation could soon spiral.
“In turn, this would put pressure on central banks to raise interest rates to quell the rise, affecting corporate lending and, importantly, the US mortgage market.”
On the market, the big Footsie casualty was Scottish Mortgage Trust (LON:SMT), which fell 3.4%. Don’t be fooled by the name, SMT is one of the UK’s biggest investors in Silicon Valley, so the precipitous slide in the tech-heavy NASDAQ overnight is a worry for those holding the shares.
Record losses from British Airways owner IAG (LON:IAG) didn’t prevent bargain hunters from wading in to pick up the shares, which rose 2.5% in the early exchanges.
On the FTSE 250, yet another profit upgrade from Pets At Home (LON:PETS) prompted a 2.6% jump in the share price.
6.50 am: Footsie set for a (small) wobble
It’s been years – decades, possibly – since equity investors have had to worry about rising bond yields but they are worried about them now.
Global markets are in retreat after a sharp increase in yields on five and 10-year government bonds but it looks like UK equities are getting a milder version of the screaming ab-dabs, as the FTSE 100 is set to open just 71 points lower at 6,581.
Compare that to the 560 point fall (to 31,402) on the Dow Jones industrial average or the 96 point tumble to 3,829 by the S&P 500 and things don’t seem too bad for holders of blue-chip equities.
Sentiment towards the Footsie stocks is possibly being bolstered by the weakness of sterling against the greenback; the pound is more than half a cent lower against the dollar this morning.
Why is the US dollar so strong?
Well, it could be to do with rising bond yields …
In Asian markets, the mood is a lot more fretful. Japan’s Nikkei 225 is 1,161 points in the hole at 29,007 and Hong Kong’s Hang Seng is 892 points weaker at 29,182.
“As 10Y US Treasuries briefly touched 1.6% yesterday, Asia will be feeling the effects today,” said Robert Carnell, the regional head of research covering Asia-Pacific at ING.
“In attempting to calm markets, Fed Chair, Jerome Powell has made much of the fact that the rise in bond yields is a mark of confidence in the economy. He’s not wrong, though I suspect this will come as scant consolation if your 401K [US pension plan] is limit long NASDAQ shares,” Carnell noted.
Michael Hewson, the chief market analyst at CMC Markets, reckons this week has been characterised by the question as to whether higher rates are good or bad for stock markets.
“If last night’s price action in the US is any guide then the answer to that would be a no, with the sharp declines in the US set to result in a negative start for markets here in Europe, after Asia markets slid sharply as well,” he said.
“Central bankers would have us believe that higher rates are reflective of an improving economic outlook, and that is certainly true, but there are certain areas of the market that trade on valuations that maybe a little on the frothy side, and where perhaps investor returns might be better served by allocating capital elsewhere,” Hewson suggested.
Fortunately, the G20 meeting is taking place today where central bank governors can argue the toss over what to do about interest rate policy.
In London, the corporate news schedule is a bit busier than it usually is on a Friday, with announcements expected from British Airways owner International Consolidated Airlines SA (LON:IAG), property listings web site operator Rightmove PLC (LON:RMV), marketing and advertising conglomerate WPP Group PLC (LON:WPP) and insurer RSA Insurance Group PLC (LON:RSA).
With IAG, the focus will be on how summer bookings are faring while with WPP, often seen as a good guide to how well the global economy is doing, there will be the usual commentary on global business trends.
Around the markets
- Sterling: US$1.3952
- 10-year gilt: 0.787%, +5.16 basis points
- Gold: US$1,760.30 an ounce, down US$15.10
- Brent crude: US$65.48 a barrel, down 63 cents
- Bitcoin: US$46,438, down US$1,761
6.50am: Early Markets – Asia / Australia
Stocks in the Asia-Pacific region fell sharply on Friday after the benchmark 10-year U.S. Treasury note briefly crossed the 1.6% level on Thursday, its highest level in more than a year.
The Hang Seng index in Hong Kong fell 3.18% while the Shanghai Composite in China dipped 2.01%.
In Japan, the Nikkei 225 tanked 4% and South Korea’s Kospi fell 2.80%.
Shares in Australia moved in tandem with other Asian markets, with the S&P/ASX 200 closing 2.35% lower.
Proactive Australia news:
Nanoveu Ltd (ASX:NVU) has reported a whopping six-fold increase in its revenue from ordinary activities for the financial year ended December 31, 2020, as changes in strategy helped the company overcome COVID-19 challenges.
MMJ Group Holdings Ltd (ASX:MMJ) (OTCMKTS:MMJJF) (FRA:2P9) has revealed significant events in the operations of its investee Harvest One Cannabis (HVT:CVE) (OTCMKTS: HRVOF) (FRA:2CN) during February 2021.
Red River Resources Ltd (ASX:RVR) (FRA:R1R) recorded a 107.8% rise in revenue from continuing operations in the six months to December 31, 2020, boosted by the increased sales of copper, zinc and lead concentrates and more favourable metal prices.
European Lithium Ltd’s (ASX:EUR) (FRA:PF8) (VSE:ELI) drilling contractors have mobilised drilling equipment to site and started a resource extension drilling program this week at Wolfsberg Lithium Project in Austria.
Calima Energy Ltd (ASX:CE1) (OTCMKTS:RLTOF) (FRA:R1Y) has entered into a binding agreement to acquire 100% of the issued share capital of Blackspur Oil Corp, a privately held Canadian company with producing oil and natural gas assets in two core areas within Alberta – at Brooks and Thorsby.
Arrow Minerals Ltd (ASX:AMD) has signed a binding term sheet that sets out terms for an exploration joint venture with Trevali Mining Corp (TSE:TV) (OTCMKTS:TREVF) wherein both parties receive reciprocal exploration rights to their exploration permits in a highly prospective gold belt in Burkina Faso, West Africa.
FYI Resources Ltd (ASX:FYI) (FRA:SDL) is positioning itself to be a large producer of 4N and 5N high-purity alumina (HPA) in the rapidly developing high-tech product markets and anticipates an active and progressive six months.