Bears tightened their grip on the markets on Friday amid a global equity market rout. Australia's leading stock market index fell by more than 2% and ended near the lowest point of the day.
With an ongoing sharp run till now, retail investors were rather taken by surprise to witness this. What exactly triggered the fall?
Recently, US bond yields have risen sharply and this has reflected in global bond markets as well. The US 10-year bond yield has surged to a fresh January 2020 high of near 1.61 percent. Japan's 10-year yield rose to 0.135 percent, their highest since November 2018. German 10-year yields rose to the highest level since March.
Although higher yields reflect increasing optimism, this also reflects increased inflation and interest rate hike expectations. With the Pandemic showing signs of abating, people will spend more in the US and this could cause inflation there.
The bond market is expecting the likely rise in inflation to push the US Federal Reserve to either lower monthly bond-buying or hike interest rates, an adverse factor for markets.
Concerns have also been voiced about the new strain of the virus. UK government had announced a lockdown in various parts of the country, including London, saying that more than half of all new Covid-19 cases had been caused by a mutated, more infectious coronavirus strain. The new virus strain is said to be 70 percent more transmissible.
Market participants are concerned that this new strain of the virus and consequent lockdowns and travel bans could hamper the pace of economic recovery.
When growth is strong, the impact of higher growth in terms of cash flows or, more precisely, dividends more than offsets the negative impact of the rise in yields. The growth in the coming months is expected to be faster than the rise in bond yields. Analysts are expecting the markets to consolidate after experiencing a steep run since March last year.
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