A renewed slump in oil prices to seven-month lows dragged down world stocks and long-term bond yields on Wednesday, as bets that global inflation and interest rates will stay lower for even longer began to build again.
Signs of a growing glut of supply sent Brent crude futures skidding back to $45.50 a barrel before talk of more OPEC cuts halted the slide and steadied government debt yields and Wall Street futures prices. [.N]
Poorly performing banking stocks continued to hold down Europe’s main markets in London .FTSE, Paris .FCHI and Frankfurt .GDAXI though they too were off their lows as energy firms began to recover. .SXPP[.EU]
The earlier slide in energy costs had boosted bond prices and flattened yield curves as investors priced in lower inflation for longer, while safe-haven flows underpinned the Japanese yen.
The spread between yields on U.S. five-year notes and 30-year bonds US5US30=TWEB shrank to the smallest since 2007 as investors wagered the Federal Reserve might have to delay further rate hikes.
Thirty-year German debt yields bonds also tumbled back toward two-month lows, adding to a more than 20-basis-point drop over the past month and ahead of what will now be a closely watched sale of 30-year debt in Berlin later.
The recent setback for crude and commodity prices as well some equity markets is partly down to doubts over U.S. President Donald Trump’s promised multi-trillion dollar stimulus program, which had raised hopes of boosting inflation and growth.
“Brent now the lowest since mid-November: remember that whole reflation thing? No, neither does the market,” Rabobank analysts told clients, referring to Brent crude futures, which have slid almost 10 percent this month LCOc1.
Oil had nudged its way back above $46 ahead of U.S. trading. It shed 2 percent on Tuesday, taking U.S. crude futures 20 percent off recent highs and thus into official bear territory, a red flag to investors who follow technical trends.
It also meant oil was on course for its worst start to a year since 1991. [O/R]
In Asia there had been muted reaction to global index provider MSCI’s decision to add the first batch of mainland Chinese stocks to its popular emerging equity benchmark.
Indexes in Shanghai and Shenzen moved around 0.5 percent higher after the decision, which could ultimately bring $340 billion of foreign capital to the so-called A-share market.
The commodity and bond market turbulence and falls in Europe pushed MSCI’s all-country share index .MIWD0000PUS down 0.2 percent after its 0.7-percent slide on Tuesday compounded by a weak close on Wall Street .DJI .SPX.