Surging energy prices rattle bonds and stocks

Government bond yields rose and European stocks fell on Wednesday after energy prices surged, the IMF trimmed its economic growth expectations and New Zealand became the latest central bank to raise interest rates.

On Tuesday, European natural gas prices shot to record highs, dragging down government bond markets.

The UK’s 10-year benchmark bond yield, which moves inversely to its price, traded at 1.138 per cent on Wednesday morning, its highest since May 2019.

Government bonds tend to fall in price when investors believe inflation or higher interest rates will erode the real returns from the securities’ fixed income payments.

Germany’s 10-year Bund yield added 0.03 percentage points to minus 0.162 per cent on Wednesday, its highest since June. The yield on the US 10-year Treasury note, a benchmark for borrowing costs worldwide, rose to a four-month high of 1.5624 per cent.

In equity markets, Europe’s regional Stoxx 600 index dropped 1.2 per cent in early dealings. London’s FTSE 100 fell 1 per cent. In Asia, Hong Kong’s Hang Seng index slipped 0.6 per cent and Tokyo’s Nikkei 225 fell 1.1 per cent.

Brent crude, the international oil benchmark, rose 0.4 per cent to $83 a barrel, having advanced by almost 5 per cent so far this week after the natural gas shortage drove up demand, increasing concerns about inflation just as the US central bank prepares to reduce its pandemic-era monetary stimulus.

“The key theme markets are trying to understand is this combination of high inflation that is proving much stickier than central banks and investors anticipated, alongside slower growth,” said Anna Stupnytska, global macroeconomist at Fidelity International.

Investors had already expected some moderation in economic growth following sharp rebounds earlier in the year from 2020’s pandemic driven lows, she said. “But we think the slowdown is going to be much sharper than expected due to the global power crunch.”

Earlier on Tuesday, New Zealand’s central bank responded to surging house prices and consumer price inflation by raising its key interest rate by a quarter of a percentage point to 0.5 per cent, in its first such move for seven years.

This followed a similar move by Norway’s Norges Bank two weeks ago, while the Bank of England has signalled a shift towards tighter monetary policy by warning inflation could top 4 per cent into next year.

Kristalina Georgieva, head of the IMF, said at an event on Tuesday evening that the organisation’s July forecast of 6 per cent global growth this year would “moderate” because of pressures from coronavirus.

The comment could intensify concerns about stagflation as the US Federal Reserve, the world’s most influential central bank, gets ready to taper its $120bn of monthly asset purchases that have boosted financial markets through the pandemic.

Jobs data due on Friday are expected to show that US employers hired almost 500,000 new workers in September, bringing the Fed closer to its goal of maximum employment that analysts think will set the stage for a tapering announcement in November.

In currencies, the New Zealand dollar rose 0.7 per cent against its US counterpart to $0.6914. Sterling dropped 0.2 per cent to $1.3599. The euro also weakened by 0.2 per cent to $1.1576.