Global stocks, bonds suffer central bank anxiety attack

Reuters: Asian shares suffered their sharpest setback since June on Monday as investors were rattled by rising bond yields and talk the Federal Reserve might be serious about lifting U.S. interest rates as early as next week.

European bourses were also tipped to open with losses stretching from 1.4 percent for the FTSE to 2.2% for the DAX.

Reports that the Bank of Japan was considering ways to steepen the Japanese yield curve, along with worries that central banks more generally were running short of fresh stimulus options, hit sovereign debt and risk appetite globally.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 2.4%, pulling away from a 13-month peak. It was the largest daily drop since the frenzy caused by Britain’s vote in late June to leave the European Union. On a technical basis the index had been overbought in recent sessions, leaving it vulnerable to a pullback. Hong Kong, Shanghai and Australian stocks followed with falls of more than 2%. The Nikkei 225 lost 2% as the safe haven yen firmed and selling in bonds drove yields on 20-year JGBs to the highest since March.

Traders were unsure how the BOJ would try to steepen the yield curve if it goes down that path at a policy review later this month, but markets are worried that tapering of its buying in long-dated bonds could be among the options.

EMini futures for the S&P 500, traded in Chicago during Asian hours, swung 0.6 percent lower, though Treasuries were finding safe-haven demand. Some Fed members have been trying to convince markets that the September meeting would be “live” for a hike, even though futures only imply a one-in-four chance of a move. No less than three Fed officials are expected to speak later in the day, including board member and noted dove Lael Brainard. Any hint of hawkishness would likely further pressure bonds and equities.

“Market participants are wondering if maybe she (Brainard) is being wheeled out to give the market one last warning of a rate hike at next week’s meeting,” said Marshall Gittler, head of research at broker FXPRIMUS.