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Global stocks extend selloff, Treasury yields retreat from near four-year highs

06 February 2018

The Dow's 777-point plunge in September 2008 was equivalent to 7 percent, about twice as big as Monday's decline.

Rory McPherson, head of investment strategy at Psgima IM, said investors should expect more volatile markets heading into 2018, as this is the first year where the marginal buyer of bonds is not a central bank.

USA 10-year Treasury yields fell away from 4-year highs at around 2.84 percent. The S&P 500 and the Dow had their worst week since January 2016 while the Nasdaq had its worst since early February 2016.

European stock markets reeling from an overnight sell-off in the U.S. and Asia were heading for the worst drop since the Brexit referendum this morning, jolted by investor fears about interest rates and government bond yields.

"There's more of a risk that they go four times than two", Lisa Hornby, fixed-income portfolio manager at Schroders Investment Management, told Business Insider. However, with the Fed soon to be dominated by President Trump appointees wedded to a low interest rate policy, I am not holding my breath that the Fed will make the right policy choice. That's making bonds more appealing to investors compared with stocks.

This is a critical question as the U.S. share market invariably sets the direction for global shares including the Australian share market and historical experience tells us that slumps in shares tend to be shallower and/or shorter when there is no United States recession and deeper and longer when there is (eg, the tech wreck and the Global Financial Crisis). It's like a Super Bowl binge.

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Among the clearest indications of the Fed's current nonchalant attitude toward inflation risk is its basic adherence to the interest rate path that it set for itself at the start of 2017. It's like taking the band aid off quick.

There's reason to believe markets are getting ahead of themselves.

How severe will the back up in bond yields be? "Equities were supposed to respond to that in January but in January we had record equity inflows", said Caron. At some point, the foreign investors will not see the merits for staying in the NZ bond market and will sell out. The dollar index was up 0.5 percent at 89.55.

The Standard & Poor's 500 index, the benchmark most professional investors use, lost 73 points, or 2.7 percent, to 2,686, on track for its biggest loss since June 2016.

Wall Street slumped a record 1175.21 points, or 4.6 per cent, during its Monday session, extending Friday's hefty drop amid inflation concerns potentially forcing a quicker pace of interest rate rises by the US Federal Reserve.

Utilities .splrcu , a bellwether of bond proxies, and its defensive peer the real-estate sector .splrcr , have fallen almost 11 percent and 8 percent, respectively, since early September - against a near 8 percent growth in the broader market .spx . All the machines triggered.

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"Europe is catching the virus and is aggressively lower", said Hughes. "The game changed last week, and now it's pretty much confirmed..." Franzese says the big question everyone is asking themselves is whether this is a blip or there's something bigger at work: "A lot of people are sitting on cash and trying to decide what to do".

For now, United States bond markets are setting the tone for euro zone peers, said analysts, with many expecting 10-year Treasury yields to test 3 percent soon.

"It means it's likely the correction could go on for days", said Art Cashin, director of floor operations at UBS.

Bond yields are hardening globally, sending panic wave across global equities. The Treasury offers $26 billion 3-year notes Tuesday.

The relationship got muddled in the lead up to the financial crisis but had reasserted itself by mid-2010 as utility stock prices rallied while bond yields steadily fell. Kohli said there should be demand for the 3-year, which is reflective of Fed hiking.

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Global stocks extend selloff, Treasury yields retreat from near four-year highs