European stocks were lower Friday as bond yields continued to rise and investors kept an eye on troubled real estate giant China Evergrande headed into the weekend.
Stocks had enjoyed two strong days of gains following the Federal Reserve's policy meeting on Wednesday, as markets seemed to welcome a delay to the start of tapering and ignored the hawkish undertones of the central bank's outlook. But a delayed taper tantrum appeared to show up for bonds on Thursday, as yields shot higher and remained elevated on Friday.
"Something has clearly changed and positioning on rates is shifting. U.S. 10yr yields jumped to 1.44%, posting their biggest one-day gain since March, whilst 30yr bond yields jumped the most in a single day since March 2020," said Neil Wilson, chief market analyst for Markets.com.
"Although the Fed and BoE remain fairly cautious and the dogma of transitory inflation persists, they're starting to move beyond pandemic-era emergency mode. Investors see this and are moving too - rates steepening again as they did earlier this year," said Wilson.
Major indexes were holding on to slim weekly gains, in a week that began with sharp losses linked to fears over global contagion from troubles surrounding property group China Evergrande.
Shares on the move:
German sportswear companies Adidas and Puma both slip in opening trade Friday after U.S. peer Nike missed 1Q sales expectations and said continued supply-chain disruptions would mean lower revenue for the fiscal year than previously thought.
Nike pointed to pandemic-related restrictions in Vietnam, where much footwear production is based, as it cut full-year sales targets to single-digit growth, and warned of longer delivery times affecting the key U.S. holiday season.
Adidas also highlighted Vietnam when it set out full-year guidance this summer, although analysts at the time said supply-chain issues looked largely factored into the company's targets. Adidas traded 3.5% lower, while Puma fell 2.3%.
Drugmaker AstraZeneca rose nearly 3% after reporting results on a prostate cancer treatment.
Data in focus:
Germany's manufacturing sector is taking an expected blow from supply shortages and worries about China, its most important market, said Christian Schulz, European economist at Citi.
However, the hit wasn't as bad as feared and the domestic economy showed signs of resilience in the Ifo index, the economist said.
For Schulz, the Ifo index surprised to the upside because the drop was almost entirely driven by the current assessment component, which Citi treats like a measure of the output gap. The expectations component, which leads business investment growth by a quarter, fell less than expected by Citi.
"Growth momentum has faded, but a solid further recovery remains on the cards once supply constraints and price pressures are addressed," Schulz said.
The third successive decline in the Ifo business climate index in September provides further evidence that Germany's recovery is losing steam, as supply chain difficulties persist and the surge in gas prices piles additional pressure on prices and production, Capital Economics said.
Both the current conditions index and expectations index declined, as the surge in high gas and coal prices and supply shortages took their toll, Capital Economics' assistant economist Michael Tran said.
Nevertheless, the current conditions index remained high by past standards and is well above its average over the past decade, Tran said. Capital Economics expects GDP growth of 3.0% in the third quarter, given the low base at the start of 2Q.
Stock futures wavered and bond yields ticked up to multi-month highs, as uncertainty lingered about the future of heavily indebted property giant China Evergrande Group.
"There has been a growing feeling that there is a pullback waiting," said Seema Shah, chief strategist at Principal Global Investors. "The market is so vulnerable to any kind of shock right now given growth is slowing and valuations are looking stretched."
Markets have been whipsawed this week by fears that the possible collapse of Evergrande could spill over into global markets and add to an already darkening outlook for global growth. Evergrande inched closer to a potential default Friday as a deadline on a key interest payment to its U.S. dollar bondholders passed without any announcement.
"It is one of the largest companies in the second largest economy in the world and if something pulls down Chinese growth it is going to pull down global growth," said Ms. Shah.
In U.S. off hours trading, Meredith Corp. surged 19% off hours after The Wall Street Journal reported the People Magazine publisher was in talks to be acquired by Barry Diller's IAC/InterActiveCorp.
Shares of Nike fell 4% in premarket trading after the sportswear giant lowered revenue guidance, citing supply-chain disruptions in Asia. Shares in warehouse grocery chain Costco ticked up 0.8% after the warehouse grocery giant reported quarterly sales.
The DXY dollar index fell, erasing some of the gains in the wake of Wednesday's U.S. Federal Reserve announcement that took it to a one-month high, but investors should return to buy the currency due to prospects of tighter monetary policy, ING said.
"We are still inclined to think markets will buy the dips in the dollar given the reinforced backdrop of policy normalisation in the U.S.," it said.
The Fed said it could start tapering asset purchases as early as November while interest rates could rise by the end of next year. ING said markets for now seem reluctant to "trust" the Fed's interest-rate projections and may need more evidence from U.S. data.
The pound traded steady, failing to build on Thursday's gains after a Bank of England policy statement suggested the central bank was moving closer to tightening monetary policy, and MUFG said it could reverse these gains due to near-term risks to the U.K. economy.
These include reduced pandemic-related support, surging gas prices and continuing supply bottlenecks. The hit to real incomes from surging utility bills just as an increase to benefit payments added during the pandemic is taken away "could undermine consumer confidence and weaken consumer spending," said MUFG's Derek Halpenny.
Sterling advanced nearly 1% versus the dollar Thursday "but near-term elevated risks leave us more wary of the move reversing," he said.
Markets were contending with a rise in government bond yields, after several central banks-including the Fed-this week signaled they were on the path toward removing pandemic-era stimulus measures.
The yield on the benchmark 10-Year U.S. Treasury note rose to 1.437% Friday, from 1.408% Thursday, hitting its highest level since July.
OFI Asset Management expects a gradual rise in U.S. and eurozone bond yields by year-end as central banks intend to gradually remove some monetary stimulus, said Jean-Marie Mercadal, head of investment strategies.
OFI AM's year-end targets for the 10-year U.S. Treasury and German Bund yields are 1.75% and -0.20%, respectively, with the expected increases not triggering any major price fluctuations in markets.
Markets seem to have priced in the Fed's intention to scale back asset purchases, he said.
The European Central Bank also decided in September to continue asset purchases at a "moderately lower" level in the coming quarter compared with 2Q and 3Q.
A new German government with a softer stance on austerity and no strong opposition against a permanent EU debt capacity would argue for tighter eurozone periphery spreads, said Christoph Rieger, head of rates and credit research at Commerzbank.
Germany will hold elections on Sunday, with recent polls showing the Social Democratic Party (SPD) in the lead. "While a moderate shift to the left under an SPD-led German government should not come as a surprise at this stage, the FDP [Free Democratic Party] counterweight in a traffic light coalition may turn out to be weaker than some expect," he said.
The traffic light coalition scenario refers to a government formed by SPD, FDP and the Greens.
Euro-denominated corporate bonds are tightly priced suggesting limited scope for further gains until the end of the year, said UniCredit. "Tight spread levels across European credit market segments suggest only limited scope for tightening until the end of the year," analysts at the bank said.
The market is set to hold steady Friday, as little-changed equity and Bund futures this morning suggests that European credit market spreads are likely "to close the week pretty flat today," they said.
Oil prices rose, with both benchmarks on course for weekly gains. Brent's trading close to its October 2018 high, with UBS's Giovanni Staunovo pointing to the supply disruptions and recovering oil demand that have caused volatility in the market since August.
On top of Hurricane Ida, maintenance work in Kazakhstan, as well as outages in Nigeria, Mexico, and Libya have all contributed to rising prices in recent weeks, he added, forecasting a Brent price of $80 a barrel for the end of the month.
Gold rebounded after a steep fall on Thursday that was prompted by rising bond yields and signs that global central banks could soon hike rates to tame inflation. The precious metal slumped as low as $1,739.70 in the previous session as U.S. treasury yields rose to their highest level since July.
"The market is showing a little bit of a taper tantrum," says Seema Shah, chief strategist at Principal Global Investors, of the rising bond yields. Signs that global central banks were moving to remove pandemic-era stimulus measures are behind the move in bond markets, she said.
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