Global stock markets are reeling on Friday, with sharp sell-offs around the world. Investors globally are rebalancing their portfolios amid suggestions that the era of ultra-loose monetary policy could be coming to an end.
Asian bourses lost substantial ground overnight. Japan’s Nikkei closed down by almost 1% on Friday, while the ASX 200, Australia’s benchmark stock index dropped by 1.7%.
The equity slide has continued into the European morning, although losses are much more marginal. Major European bourses are losing no more than 0.4% in early trade. However, all indexes other than the FTSE 100 dropped more than 1% on Thursday Writing in an email on Friday morning, Accendo Markets’ Mike van Dulken says the morning’s activity “comes after a weak Wall St finish (Tech underperforming) extended to Asia overnight as a bond market sell-off inspired by hawkish (perhaps misconstrued) central bank comment proves contagious for equities.
“After years of low rates and QE pushing the two sector asset classes to record highs, the relationship appears to hold even in the case of a reversal. Sentiment is however off its lows thanks to China PMI data and major equity levels having held up.”
Here’s the scoreboard at around 8.20 a.m. BST (3.20 a.m. ET): The stock and bond market sell-offs started when Draghi hinted on Tuesday that he may be open to the removal of some of the bank’s unprecedented monetary stimulus, which has taken the form of negative interest rates and €60 billion of quantitative easing. The bond market sell-off has continued for three days, despite ECB sources telling both Reuters and Bloomberg that investors have misinterpreted Draghi’s comments and overreacted to them. Carney joined the party on Wednesday with a set of more hawkish than expected remarks.
“Some removal of monetary stimulus is likely to become necessary if the trade-off facing the MPC continues to lessen and the policy decision accordingly becomes more conventional,” Britain’s most senior monetary policymaker said while speaking on a panel at the European Central Bank’s Forum on Central Banking.
As recently as last week, Carney said that he was not ready to vote for a rate hike. He is one of the more dovish members of the bank’s Monetary Policy Committee. On Wednesday he sought to clarify his position, effectively saying that he would be ready to vote for a rise in rates if business investment begins to rise, which should offset weaker consumption in the process.
After close to a decade of hyper-accommodative monetary policy, markets effectively take for granted the fact that interest rates are at record lows and that central banks will buy bonds. Any hint that could be removed is taken badly by the market. It is a phenomenon previously witnessed during the so-called “taper tantrum” of 2013 when fixed income assets sold off sharply after the US Federal Reserve started to lessen, or “taper” its QE programme.