Markets wave off global risks; Simmering fears of a global trade war.

Global Stock Markets

An embarrassing political scandal in Japan. Rapid job-turnover inside the White House and the threat of faster interest rate hikes in the United States. 

In any other era, this concoction would be a perfect recipe for heightened market volatility. But in recent months, markets have brushed aside risks and recurring bad news on geopolitics to stay focussed on positive macro-economic cues. 

And Guy Debelle, the Australian central banker who oversaw a review of global foreign exchange standards, says it doesn’t make sense. 

Investors got a taste of what the spike in volatility might look like when in early February fears of faster U.S. rate hikes hammered world shares.

That sell-off was short-lived, though, and equity prices are now not too far from their February highs.

A gauge of market volatility .VIX is near all-time lows, while most estimates of the term premium for 10-year Treasuries US10YT=RR are around zero, or even negative, despite projections of multiple rate rises by the U.S. Federal Reserve this year and next.

This comes at a time the world is seeing the first synchronised global growth since 2007, with strong corporate earnings and blistering job-creation.

Higher rates could all but dampen the optimism, and that is just one of the many risks.

The danger of a global trade war looms after U.S. President Donald Trump slapped duties on imported steel and aluminium and has threatened further tariffs on Chinese goods. 

In Japan, a cronyism scandal has engulfed Prime Minister Shinzo Abe and Finance Minister Taro Aso, causing uncertainty around political stability. 

Yet the market response so far: stay calm and look away. 

Despite shock events like Britain’s vote to leave Europe, the threat of a euro-zone break up and the potential for a nuclear war with North Korea, market volatility spiked only temporarily. 

In fact, equity returns last year were among the highest since the 2008 global financial crisis. 

Emerging markets did well too, and the Australian dollar AUD=D4, considered a barometer for global risk, jumped 8.7 percent in 2017, its best performance in seven years. 

For Shane Oliver, Sydney-based head of investment strategy at AMP Capital, risks can create chances to buy.

World stocks reeling to five-day low to end turbulent February

Global Stock Markets

World stocks were set to snap a record 15-month long winning streak on Wednesday, tumbling another quarter percent after new Fed boss Jerome Powell’s comments suggested the possibility of four U.S. interest rate rises this year rather than three. 

Barely recovered after an early-February sell-off, equity sentiment has been shaken by Powell and by data showing China’s manufacturing sector slowing to its weakest in over 1-1/2 years and Japanese industrial output down the most since March 2011.

The U.S. Federal Reserve chief, in his debut testimony to Congress on Wednesday, struck a mildly hawkish note, noting inflation had risen since December and vowing to prevent the economy from overheating.

That was enough for traders to add bets on the Fed squeezing in another rate rise this year, with futures tied to target policy rates now pricing a one-in-three chance of a fourth hike.

With U.S. 10-year yields again approaching recent four-year highs, New York shares closed 1 percent lower on Tuesday. MSCI’s all-country index fell 0.8 percent on Tuesday and tumbled another 0.3 percent on Wednesday.

Wall Street’s main volatility gauge, the VIX, opened a touch lower, after seeing its biggest daily rise since early-February.

But a fall in new orders for U.S.-made capital goods for the second month in a row, plus the dismal Chinese and Japanese numbers, have made investors fret about a possible setback to growth, especially in China, the world’s No. 2 economy.

Emerging equities fell 1 percent, pulled down by a 1.4 percent tumble in Hong Kong and on track for their biggest monthly loss since November 2016, while Japan’s Nikkei lost 1.4 percent and snapped a five-month run of gains.

European shares lost around 0.3 percent and have shed 3.6 percent in February, their first monthly loss since November. Equity futures suggested a flat to slightly firmer session for Wall Street.

Not everyone is bearish however.

Analysts at Unicredit agreed. They said that while markets might price in higher U.S. interest rates, these would likely remain modest and also hinge on economic data staying robust. 

Markets are ending February pretty much as they began it -- on a sour note, spooked by concerns U.S. inflation would pick up and that central banks could end up tightening policy further and faster than originally anticipated.

Those fears were behind the selloff that wiped trillions of dollars off world stocks in less than a week early in February. The MSCI index remains more than 5 percent below record highs hit at the end of January.

Their path higher is likely to be hindered by bond markets, with U.S. 10-year yields close to the psychologically key 3 percent level and up 17 basis points this month.

Headwinds also could come from the dollar, which is set for a monthly rise against a basket of currencies following three months of declines and which touched three-week peaks after Powell’s comments.

Analysts at UBS Wealth Management predicted that U.S. GDP data due later in the day would reinforce “the picture of an economy performing at or above trend, justifying four rate hikes this year”.

But the Bank of Japan and European Central Bank could act as counterweights to a hawkish Fed -- euro zone inflation for February at 1.2 percent showed on Wednesday that the ECB’s near-2-percent target remains years away.

German 10-year bond yields meanwhile are set for their first monthly fall since October, down 2.5 basis points in February, while Japanese yields are just off two-month lows hit earlier this week. 

Asian shares mostly firmer, dollar loses early edge

Asian Stock Markets

Asian shares made guarded gains on Monday as investors braced for an event-packed week headlined by U.S. inflation data and the first House testimony by the new head of the Federal Reserve.

Spread betters also pointed to a stronger start for Europe and FTSE futures were already 0.5 percent higher.

But sentiment was fragile, with the dollar reversing its early rise and safe-haven bonds firming as E-Mini futures for the S&P 500 turned flat.

MSCI’s broadest index of Asia-Pacific shares outside Japan crept up 0.6 percent, with most bourses in the green.

Japan’s Nikkei led with an increase of 1.3 percent, while Chinese blue chips added 0.7 percent.

China’s ruling Communist Party on Sunday set the stage for President Xi Jinping to stay in office indefinitely, with a proposal to remove a constitutional clause limiting presidential service to just two terms in office.

Investors initially took heart from Friday’s rally on Wall Street which saw the VIX volatility index end at 16.49 percent, far below the 50 percent peak touched at the height of market turmoil in early February.

Asian stocks slip after European surge fades, dollar edges up

Asian Stock Markets

Asian stocks slipped on Tuesday, their recent recovery stalling after European equities broke a winning streak, while the dollar edged up to pull further away from three-year lows. 

MSCI’s broadest index of Asia-Pacific shares outside Japan shed 0.5 percent. Australian stocks fell 0.3 percent, South Korea’s KOSPI lost 0.7 percent and Hong Kong’s Hang Seng dropped 0.85 percent. 

Japan’s Nikkei retreated 1.25 percent after three successive days of gains. 

The pan-European STOXX index fell 0.6 percent on Monday following a three-day ascent, dragged down by falls in consumer staples stocks. 

U.S. markets were closed on Monday for a holiday, and the focus will be on whether Wall Street can maintain its recovery once trading resumes. 

The Dow gained 4.5 percent last week, winning back more than half of the territory lost during a sharp downturn earlier in the month. 

The VIX index - Wall Street’s “fear gauge” measure of market volatility - has slipped below 20, less than half the 50-point peak touched earlier in February. 

The dollar index against a basket of six major currencies was 0.3 percent higher at 89.348 to put further distance between a three-year low of 88.253 set on Friday. 

The dollar was a shade higher at 106.720 yen and the euro dipped 0.15 percent to $1.2388. 

Oil prices hovered near two-week highs, lifted by tensions in the Middle East after Israeli Prime Minister Benjamin Netanyahu said on Sunday that Israel could act against Iran itself, not just its allies in the region. 

U.S. crude futures were 0.8 percent higher at $62.16 per barrel after touching $62.74, the highest since Feb. 7.Spot gold slipped 0.35 percent to 1,341.24 an ounce, weighed by the dollar’s bounce.

Asian shares extend global recovery as volatility subsides

Asian Stock Markets

Asian shares gained on Monday, joining a global recovery for equity markets as sentiment improved gradually from a recent shakeout that was sparked by fears of creeping inflation and higher borrowing costs. 

MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS rose 0.5 percent, having recovered more than 40 percent of its losses from late January to last week’s low.

Trading was slower than usual due to market holidays in the United States as well as Greater China.

Japan's Nikkei .N225 gained 2.0 percent while U.S. stock futures ESc1 climbed gained 0.4 percent in Asia on Monday.

European share are also seen rising, with spread-betters expecting advances of up to 0.8 percent in Germany's Dax .GDAXI, 0.5 percent in France's Cac .FCHI and 0.2 percent in Britain's FTSE .FTSE.

MSCI’s index of stock markets across the globe .MIWD00000PUS gained 4.3 percent last week, the best weekly performance since December 2011.

The rebound came after a two-week rout that wiped off more than 10 percent of value at one point, triggered by worries a rise in U.S. inflation may boost dollar funding costs. 

The sell-off took place even as the corporate earning outlook improved on the back of strong global growth, bringing down equity valuations off highs hit earlier this year. 

The U.S. 10-year Treasuries yield rose to a four-year high of 2.944 percent US10YT=RR last week, compared to 2.411 percent at the end of last year. 

The two-year U.S. yield US2YT=RR hit its highest level since 2008 last week as investors bet the Federal Reserve will raise interest rates at its next policy meeting in March. The U.S. cash bond market is shut on Monday for a holiday. 

In October, the Fed started trimming reinvestments in Treasuries and agency bonds. As the Fed plans to gradually reduce reinvestments, the impact is expected to get bigger this year. 

While the Fed scales back its bond purchases, the U.S. government is expected to increase its debt issuance after Congress reached a deal earlier this month to raise spending by almost $300 billion over the next two years. 

The minutes of the Fed’s last policy meeting, held amid the equities tumble on Jan. 30-31, are due on Wednesday. Besides the outlook on rates, markets will be keen to see what, if anything, the Fed makes of the gyrations in markets. 

A fall in the Vix index .VIX, a gauge of expected volatilities in U.S. stocks, also helped underpin improving sentiment. 

The recent sell-off is believed to have been amplified by a jump in the Vix as many players are thought to have adjusted their portfolio in line with the change in volatilities. 

The euro EUR= stood at $1.2426, backing down from Friday's three-year high of $1.2556.

The dollar traded at 106.24 yen JPY=, bouncing back from its 15-month low of 105.545 set on Feb 16. 

The U.S. currency has been weighed down by a barrage of factors, including worries about widening U.S. trade and budget deficits and speculation Washington might pursue a weak dollar strategy. 

There is also talk that foreign central banks may be reallocating their reserves out of the dollar.

The weaker dollar propped up commodities. 

U.S. West Texas Intermediate crude CLc1 rose 1.1 percent in Monday Asian trade to $62.37 per barrel, extending their rebound from a 1-1/2-month low of $58.07 set on Feb. 9.

Stocks set for best week in 6 years

Global Stock Markets

World shares were set for their best week of gains in six years on Friday after two consecutive weeks in the red, shrugging off a rise in global borrowing costs while the dollar hit its lowest since 2014.

MSCI’s world index of stocks, which tracks shares in 47 countries, was up 0.3 percent after European bourses opened. After suffering its biggest weekly drop since August 2015 last week, the index is now on track for its best showing since early December 2011.

Some investors have been puzzled at the quick rebound, which has coincided with a rise in bond yields on signs that inflation is starting to creep up globally.

The argument commonly offered by economists has been that historically, it is not unusual for stocks and bond market borrowing costs to rise in tandem in a rapidly expanding economy.

Yields across the euro area were mostly steady, although Germany’s benchmark Bund was within sight of 2-1/2-year highs and set for its biggest weekly rise in eight weeks.

Investors were also watching for a sovereign debt rating update on Greece from Fitch, set for release later in the day.

European shares were also set to chalk up healthy weekly gains, snapping a three-week losing streak as earnings updates continued to impress, and volatility and jitters over rising inflation eased.

Among country benchmarks, the UK’s FTSE was up 0.6 percent and Germany’s DAX added 0.5 percent, while Italy’s FTSE MIB was up 1 percent.

The pan-European benchmark is up 3 percent so far this week, set for its best week since December 2016, but still down around 6 percent from the 2-1/2-year peak it hit in January.

With many Asian markets closed on Friday for the Lunar new year, MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.3 percent.

Japan’s Nikkei rose 1.2 percent, with investors relieved to see the government appoint Bank of Japan Governor Haruhiko Kuroda for another term, suggesting the central bank will be in no rush to dial back its massive stimulus programme.

Equity investors have drawn a degree of reassurance from a fall in the VIX index - a measure of implied volatility on the S&P 500 index, also known as Wall Street’s “fear gauge”.

The index dropped below 20 for the first time since it spiked to a 2-1/2-year high of 50.3 last week, a jump that caused massive losses among investors who bet equity markets would stay stable on a combination of solid economic growth and moderate inflation.