On Thursday, world stock markets remained unstable as U.S. bond yields rose near four-year highs following congressional leaders agreeing on a two-year budget deal that will raise government spending by nearly $300 billion. The deal looks set to increase the U.S. federal deficit and may stimulate inflation, encouraging the Federal Reserve to hike up interest rates quicker than anticipated.
Euro zone yields were also higher while a hawkish comment from the Bank of England regarding interest rates drove down UK stocks about 1 percent and boosted yields on UK government bonds to the highest since 2015.
Although the MSCI’s world index has moved up from the two-month lows seen earlier in the week, Wednesday’s rebound has faded. The index shed 0.2 percent while European bourses were oppressed by both commodity and technology stocks.
The pan-European STOXX 600 share index dropped 0.5 percent, down nearly 3 percent year-to-date.
Wall Street is pointing towards a weaker session, with U.S. stock futures down a quarter percent and investors seeing the potential for higher inflation and borrowing costs.
That has “toned down the straight line move on equity markets, led to a more volatile environment and limited the potential for equities,” Francois Savary, chief investment officer of a wealth management firm, speaking on investors’ bullishness before the recent correction.
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“I don’t think markets can recover immediately (from the shock), there needs to be a stabilization phase” Savary added.
The prior two sessions saw the heaviest volumes traded on the STOXX 600 index in over seven months. Meanwhile, volumes on U.S. exchanges surpassed 9 billion shares on Wednesday for the fourth day in a row. This is a figure beaten only once previously in the past seven months, according to Deutsche Bank.In Asia, MSCI’s index of emerging Asian equities lingered near six-week lows.
Focus was on China, where Shanghai’s benchmark index dropped to a six-month low after Beijing restarted an outbound investment scheme after a two-year break, granting licenses to about a dozen global money managers, according to sources.
The recent selloff sent the VIX index, though of as Wall Street’s “fear gauge”, flying. On Thursday, the index fell just below 30, but is still double from the past few month’s levels.
Bond yields gained momentum again on Wednesday from U.S., lawmakers’ budget deal, with 10-year U.S. yields back up to 2.84 percent. Concerns regarding the economic boost resulting from President Trump’s tax cuts and higher deficit spending could overheat the economy and speed up inflation. The Senate and the House were both expected to vote on the deal on Thursday.