By Joyce Yu
Philadelphia, PA–A report that says China, the United States’ biggest buyer of sovereign bonds, could be slowing down or even halting its purchases, sent global equity markets lower on Wednesday, pushing treasury yields higher.
Yields on 10-year Treasuries continued to advance to the highest level in about 10 months as Chinese officials were said to recommend slowing or halting purchases of the securities, according to a Bloomberg report. Gold, the euro and Swiss franc all jumped following the news.
Citing people familiar with the matter, the report notes that Chinese officials think U.S. debt is becoming less attractive compared to other assets, adding that trade tensions between the two countries could provide a reason to slow down or halt the purchases.
I think the Chinese will contribute to the removal of liquidity from the U.S. bond market,” Michael Shaoul, chairman and CEO of Marketfield Asset Management shared with CNBC. “That’s not helpful to a bond market that’s already under pressure.”
Also pushing yields higher was speculation that the Bank of Japan will join the European Central Bank and US Federal Reserve in scaling back its stimulus program this year. The Fed is expected to raise rates three times this year after three rake hikes in 2017.
Equity markets look worried following the news. Enthusiasm on global markets has faded with most European indexes falling in early trading. The majority of Asian markets ended the day with losses. All three major U.S. indexes hit new all-time highs on Tuesday, but opened lower on Wednesday for the first time in 2018.
Billionaire bond manager Jeffrey Gundlach forecast in a year-ahead outlook webcast that the S&P 500 Index will end the year with a negative return after a “pretty decent run” early in the year. Other more bullish analysts argued equity markets have enough momentum to keep rising.
“When you start off the year the way we did, it’s usually because of asset allocation decisions made in December,” said Michael Shaoul. “Now the market needs to recharge its batteries. This pattern is normal.”
“For a market that was probably looking for reason to take a pause, it’s not unreasonable to use today’s rise in yield as a catalyst,” said Art Hogan, chief market strategist at B. Riley FBR in Boston.
Investors are all eyeing on companies’ earing reports which are expected to provide some indications for the stocks markets going forward. Fourth-quarter earnings for S&P 500 companies are expected to increase by 11.8%, with biggest contribution from the energy sector, according to Thomson Reuters I/B/E/S. In addition, it will be the first time for American companies to talk about guidance that incorporates lower tax rates.
