Stocks flat, bond yields lower, all eyes on central banks

A share trader checks his screens at the stock exchange in Frankfurt, Germany - Reuters

London (Reuters): Global equity markets were flat on Wednesday, hoping central bank action in the world’s biggest economies could temper some of the slowdown in world growth, even though bond yields continued to flag recessionary fears.

European shares which broke four straight days of losses on Tuesday, held steady though bank shares got a 1% lift from comments by European Central Bank governor Mario Draghi who signalled more assistance for banks via a cheap loans program.

German 10-year yields, already below zero percentage since Friday, fell further in negative territory, while the US bond yield curve remained inverted - three-month bills are yielding more than 10-year bonds - the key signal of recession dampened appetite for risk.

The US yield curve inversion, which has preceded every US recession for the last 50 years, triggered a sharp stock selloff last week. The drop in yields picked up pace after the US Federal Reserve signalled a halt to its rate increases.

Markets got a reminder of global growth risks after Chinese data showed industrial profits shrank the most since late-2011 in the first two months of the year. That came after lacklustre economic data on Tuesday from Germany and the United States.

However, MSCI’s all-country world equity index, which tracks shares in 47 countries, was down around 0.1% while Chinese mainland shares bounced almost one% as expectations deepened of more central bank stimulus.

“Our view is that reflation story remains on track. We do expect the (Chinese) government to come to the rescue and provide some respite,” said Justin Onuekwusi, portfolio manager at Legal and General Investment Management.

“It feels to me that markets had priced in a lower-for-longer (interest rate) environment even before central banks. They had come a long way very quickly and now they are taking a bit of a breather. Global growth overall looks reasonably healthy, despite the slowdown,” he added. Most market players agree recession fears were real but saw no clear sign of a huge slowdown, especially with interest rate rises receding. Draghi too said the euro area’s economic soft patch did not necessarily foreshadow a serious slump and the bank could further delay rate hikes if necessary.

“Most economic forecasts, including our own, are such that the second half of the year should see a cyclical pickup in activity - but the market is pricing something different,” said Peter Schaffrik, head of European rates strategy at RBC Capital Markets.

Earlier, MSCI’s broadest index of Asia-Pacific shares outside Japan nudged up 0.1% while Wall Street was set for a firmer open, futures signalled.

Bruised Kiwi

New Zealand’s central bank joined its peers in the United States and Europe by turning dovish - it flagged a possible interest rates cut, sending the kiwi dollar 1.6% lower to its lowest in 2-1/2 weeks.

The move also weighed on the Australian dollar.