GLOBAL MARKETS-Shares drop for third day, yields soar as markets brace for rate hikes

BY Reuters | ECONOMIC | 09/28/21 04:36 AM EDT

* Graphic: Global asset performance

* Graphic: World FX rates

By Ritvik Carvalho

LONDON, Sept 28 (Reuters) - Global shares fell for a third successive day on Wednesday, while bond yields on both sides of the Atlantic soared on anxiety over when central banks might raise interest rates.

MSCI's All Country World Index, which tracks shares across 49 countries, was down 0.3% on the day after the start of trading in Europe.

The 10-year U.S. Treasury yield hit 1.5444%, its highest level since Jun. 17, pulling up euro zone bond yields in its wake. Two-year Treasury yields surged to 18-month highs.

A market measure of euro zone inflation expectations jumped to 1.81%, its highest level in two weeks.

Surging yields pressured high-growth technology shares at the start of trading in Europe while fresh signs of a slowdown in China's economy also weighed on investor sentiment, pushing the pan-European STOXX 600 index down over 1%.

Britain's FTSE 100 index fell 0.5%, while Germany's DAX fell 0.8%. France's CAC 40 fell 1.1% and Italy's FTSE MIB index slipped 0.6%.

"The global equity market is having difficulties rising in a wall of worries as the energy crunch and re-pricing of the U.S. (and EU over the month) is potentially changing the timing and speed of future rate increases or at least tapering," said Sebastien Galy, senior macro strategist at Nordea Asset Management.

Rising yields also boosted the dollar, with the index that measures the greenback's strength rising to a five-week high. The Japanese yen fell against the dollar and the euro as rising yields made the currencies more attractive to Japanese buyers.

Earlier in Asia, shares were mixed across regions as the fallout of Chinese property developer Evergrande's debt crisis and a widening power shortage in China weighed on sentiment.

Australia's benchmark S&P/ASX200 index closed 1.47% lower, led by a sell-off in healthcare and technology stocks, while Japan's Nikkei was down 0.2% after halving its initial losses.

China's blue chip index CSI300 edged up 0.1%, as Hong Kong's Hang Seng Index gained 1.34%, snapping a recent run of negative sessions.

During Asian trade, Brent crude oil hit $80 a barrel for the first time in three years, driven by regional economies beginning to reopen from the COVID-19 pandemic and supply concerns.


Hong Kong and mainland China's major property indices rose between 3% to 8% after the People's Bank of China (OBOC) pledged to support homeowners.

"There has been positive news for the property sector, and markets are digesting that after all of the negative news flow of the past few days," Tammy Leung, Everbright Sun Hung Kai strateigst said.

Investors remain on edge over the future of Evergrande, which failed to meet a deadline to make an interest payment to offshore bond holders.

Evergrande has 30 days to make the payment before it falls into default and Shenzen authorities are now investigating the company's wealth management unit.

Gold prices fell to a 1-1/2-month low on Tuesday, with spot gold hitting its lowest level since Aug. 11 at $1,735.40 per ounce.

London nickel and tin prices extended losses into a second session on Tuesday, as widening power cuts in top metals consumer China cause worries over downstream demand.

Analysts said the blackouts could affect China's listed industrial stocks.

"What we see in China with the developers and the blackouts is going to be a negative weight on the Asian markets," Tai Hui, JPMorgan Asset Management's Asian chief market strategist told Reuters.

"Most people are trying to work out the potential contagion effect with Evergrande and how far and wide it could go. We keep monitoring the policy response and we have started to see some shift towards supporting homebuyers which is what we have been expecting."

Commonwealth Bank economists estimate two months of power rationing in key provinces in China could shave 0.1 percentage points off this year's economic growth, and 0.3 percentage points off next year's.

"Markets have been jittery amid focus on China's regulatory clampdown and the prospect of the Federal Reserve tapering its asset purchases," BlackRock Investment Institute said in its global weekly commentary.

"We believe the path for further gains in risk assets has narrowed after an extended run higher, warranting a selective approach, but we reaffirm our tactical pro-risk stance."

It said it was shifting its view to a 'modest' overweight in Chinese assets, in the context of very small client allocations to the asset class.

(Reporting by Ritvik Carvalho; additional reporting by Sujata Rao in London and Scott Murdoch in Hong Kong, editing by Timothy Heritage)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

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