Volatility in financial markets intensified on Monday and Tuesday, leading investors to seek safety in less risky assets. Safe-haven currencies like the yen and the Swiss franc have risen sharply, while government bond yields such as that of Japan, the US and Germany have dropped to near or at record lows.
Equities have been the main losers in the current market rout. US indices fell sharply for a second day on Monday and the S&P 500 is down 9.3% since the start of the year. European equities did not fare any better with all major European indices recording losses of around 3%. In Asia, Tokyo was the biggest casualty as many markets were closed for the Lunar New Year. The Nikkei 225 index, which is sensitive to exchange range movements, plunged by 5.4% on the yen’s appreciation.
Global stocks are being weighed down by a combination of factors. China’s slowdown and fears about global economic growth are the main reasons. More recently, fresh falls in commodity prices and uncertainty about the path of Fed rate hikes in the US have further damaged market sentiment. Energy and mining companies have seen their share prices plummet in recent months but on Monday, bank stocks were one of the worst performers.
The banking sector has come under focus as weak global growth and a protracted outlook of ultra-low interest rates has dampened their earnings prospects. Low interest rates hurt banks’ profitability and banks in Europe are particularly vulnerable to negative rates. These concerns have led to an increase in the cost of insuring against bank debt defaults, which has further fuelled the sell-off in banking stocks.
The demand for safe havens has boosted the Japanese currency with the yen gaining around 4% versus the US dollar to below 114 yen. The yen’s slide against the greenback following the surprise decision by the Bank of Japan to adopt negative interest rates at the end of January proved short lived when it briefly topped 121 yen.
The Swiss franc has also made strong gains in the past few days, reversing the dollar’s 2% advance since the start of the year to above 1.02 francs, pulling it back to 0.98 francs.
The euro has had a more mixed response as it was weighed down on Monday by a widening in the yield spread of periphery Eurozone government bonds such as Portugal and Spain and traditional safe havens like German bunds. The single currency spiked below 1.11 dollars on the widening spreads but recovered back above 1.12 dollars today. Political risks in periphery Eurozone countries are persisting amid doubts about newly elected governments sticking to the deficit reduction plans. However, yields fell back today after 5-year Eurozone inflation expectations hit a record low, raising the prospect of further monetary easing by the ECB.
Japanese and US government bonds have also benefited. Ten-year Japanese government bond yields went into negative for the very first time today, while 10-year US treasury yields hit a one-year low.
Another winner has been gold. The precious metal has rallied by around 12% in 2016 and hit an 8-month high of $1200.60 an ounce on Monday.
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