Bonds rally as economic threat hits risk appetite

BLOOMBERG 

Government bonds rallied and stocks dropped as investors hedged the risk that economies would flag under central banks pushing their inflation-fighting zeal and rate-hiking campaigns too far. European bond yields slumped as the Stoxx Europe 600 Index extended declines to a sixth day, the longest losing streak since October.Germany’s 10-year benchmark yield tumbled four basis points as data showed the business outlook deteriorated to the lowest seen this year as Europe’s biggest economy struggles to emerge from recession.
Anxiety has been rising in equity markets that central banks determined to extinguish inflation will keep pushing rates higher and risk breaking fragile economies. Futures on the
S&P 500 pointed lower after the gauge suffered its worst week since March, while yields on benchmark US Treasury yields dropped four basis points.
“As central banks remain hawkish on the back of persistent inflationary pressure, the likelihood of a soft landing is falling,” said Andrew McCaffery, global chief investment officer at Fidelity International, in a note. “Investors should consider lowering overall risk appetite.” Meanwhile, markets have absorbed the biggest threat to President Vladimir Putin’s almost quarter-century grip on power.
Russian officials met key partners, including in China, a day after Yevgeny Prigozhin halted the advance of his Wagner mercenary group towards Moscow. Oil turned higher, with traders alert to the risk that
any prolonged turmoil in Russia could reverberate through global oil markets. The country’s war in Ukraine has already upended trade flows, with major consumers in Asia including China boosting imports of Russian energy.
“The latest happenings make us realise that it’s important to have geopolitical hedges in the portfolio, so we’ve always had commodities fulfil that role,” Trevor Greetham, head of multi asset at Royal London Asset Management Ltd, said in an interview with Bloomberg TV.
“When there is suddenly a big military event, commodity prices can surge and you’ve got that protection.” Gas traders were also bracing for more market turbulence, with European gas already seeing the highest volatility since the invasion of Ukraine. Shares of Russian aluminum producer United Co, Rusal International PJSC, which offer some insight into appetite for the nation’s assets via Hong Kong-traded securities, fell almost 9%.