Companies such as Visa, Exxon, and Apple were amongst the biggest drops in the European and American stock markets that tumbled from record highs reached less than a month ago. On Tuesday 30th January, the pressure of the global bond market resonated across equity markets with US stocks sliding 0.8 percent in the first few minutes of trading. This was followed by Germany’s Dax index falling 0.9 percent, France’s CAC by 0.7 percent and the UK’s FTSE 100 dropping by 0.8 percent, followed by drops in Asia for Japan’s Topix Index, Hong Kong’s Hang Seng Index and South Korea’s Kospi.
Growing optimism over the potency of the world economy has buoyed equities, which enjoyed its best start to a year since 1987, but brought about concerns that inflation is finally making a comeback, forcing central banks to turn aggressive and tighten monetary policy this year.
However, the US Federal Reserve has currently kept interest rates unchanged, but did mention on Wednesday that inflation is likely to rise this year. This caused growing fears of a bond market rout as it sent the yield of the ten-year US government bond – a global benchmark – to a three-year high of 2.84 percent (as of the 2nd of February). To keep up with inflation, there is an expectancy of a Fed hike which could mean a sharp decrease in bond prices in the not-so-distant future.
Rising bond yields makes borrowing more expensive and may potentially put a strain on companies that have been relying on cheap capital to grow, and as such also make equities less attractive. This can be seen by the steady decrease of the S&P 500 index that has been slowly declining since Monday, dropping 3.71% to $2,762 – its worst performance since May last year.
The potential of a bond and stock selloff happening right now is undoubtedly high. With stocks falling almost 4% and volatility coming crashing back in to the economy, it all comes as something unexpected with shares decreasing even as company earnings estimates are up. One cannot help but wonder if this is the start of a bearish turn in the market, with the S&P 500 up by almost 50 percent in less than two years, some might see it as the end of easy money that equities have churned out over the past 13 straight months.