The tranquillity that enveloped global markets for more than two months was upended Friday as worries about interest rates sent stocks and bonds tumbling in a broad-based selloff.Kenishirotie/Getty Images/iStockphoto
Volatility is back.
The tranquillity that enveloped global markets for more than two months was upended Friday as worries about interest rates sent stocks and bonds tumbling in a broad-based selloff.
Global equities fell the most since Britain voted to secede from the European Union.
The yield on the 10-year Treasury note jumped to the highest since June and the U.S. dollar almost erased a weekly slide as a Federal Reserve official warned waiting too long to raise rates threatened to overheat the economy.
German 10-year yields rose to zero for the first time since July after the European Central Bank downplayed the need for more stimulus.
Canada's main stock index suffered its biggest loss since February, slumping to a five-week low as higher bond yields in major economies pressured global stock and commodity markets.
The Toronto Stock Exchange's S&P/TSX composite index closed down 263.38 points, or 1.8 percent, at 14,540.00.
All 10 of the index's major groups ended lower. The Canadian dollar dropped 0.65 of a cent to 76.70 cents US.
The S&P 500 fell nearly 2.5 per cent, capping its first move of at least 1 percent after 43 sessions, the longest such streak since 2014, as it broke below a roughly 30-point range it's held for about two months. The gauge had hovered near a record reached on Aug. 15 amid mixed economic data and speculation about the Fed's stance on rates. Before today's selloff, the index was up 19 percent from a 22-month low in February, and less than half a percent from its all-time high.
"Lots of skittishness and the hawkish noise comes as people begin to doubt the efficacy of monetary policy," said Michael Block, chief strategist at Rhino Trading Partners LLC in New York. "The stock selloff is happening in conjunction with a global bond pullback."
The rout started Thursday when European Central Bank President Mario Draghi downplayed the need for more measures to boost growth. Declines accelerated on Friday as Boston Fed President Eric Rosengren warned against waiting too long to raise interest rates. Mr. Rosengren's comments moved him firmly into the hawkish camp, sending the odds for a rate hike this year above 60 percent.
DoubleLine Capital Chief Investment Officer Jeffrey Gundlach said it's time to prepare for higher rates.
"This is a big, big moment," Gundlach said during a webcast Thursday. "Interest rates have bottomed. They may not rise in the near term as I've talked about for years. But I think it's the beginning of something and you're supposed to be defensive."
Calm had dominated financial markets in late summer with equity volatility and bond yields near historic lows and measures of cross-asset correlation at the highest levels since at least the financial crisis. The rise in the influence of different markets on each other has been attributed to the growing impact of central bank policy on prices, and rising concern that the era of easing may be nearing an end roiled assets from bonds to currencies and stocks on Friday.
"Dovish Fed members getting called up to bat for a hike is putting people on edge," Yousef Abbasi, a global market strategist at JonesTrading Institutional Services LLC, said by phone. "The more hawkish-leaning investors are grabbing onto that and it's certainly one of those days where people are positioning for that September hike being back on the table."
"It's really difficult to be an investor in U.S. equities right now because benchmarks are just glued to those all-time highs," said Steven Santos, a broker at Banco de Investimento Global SA in Lisbon. "There isn't much conviction to really push stocks higher, but you also don't want to completely give up on stocks when returns elsewhere look miserable."
Bloomberg, Reuters, Canadian Press