A massive drop in oil prices to seven-month low, on Wednesday, June 21, pulled down world stocks and flattened bond curves as bets that inflation and interest rates will stay lower for even longer began to build again.
Signs of a growing glut of supply sent Brent crude futures skidding back to $45.50 a barrel as European trading gathered momentum. Poorly performing banking stocks also made for a weak start for London, Paris and Frankfurt’s stock markets.
The slide in energy costs boosted bond prices and flattened yield curves as investors priced in lower inflation for longer, while safe-haven flows underpinned the Japanese yen.
The spread between yields on U.S. five-year notes and 30-year bonds US5US30=TWEB shrank to the smallest since 2007 as investors wagered the Federal Reserve might have to delay further rate hikes.
Thirty-year German debt yields bonds also tumbled back toward two-month lows, adding to a more than 20-basis-point drop over the past month and ahead of what will now be a closely watched sale of 30-year debt in Berlin later.
The recent setback for crude and commodity prices as well some equity markets is partly down to doubts over U.S. President Donald Trump’s promised multi-trillion dollar stimulus program, which had raised hopes of boosted inflation and growth.
In Asia there had been muted reaction to global index provider MSCI’s decision to add the first batch of mainland Chinese stocks to its popular emerging equity benchmark.
Indexes in Shanghai and Shenzen moved around 0.5 percent higher after the decision, which could ultimately bring $340 billion of foreign capital to the so-called A-share market.
The commodity and bond market turbulence and falls in Europe pushed MSCI’s all-country share index .MIWD0000PUS down 0.3 percent after its 0.7-percent slide on Tuesday compounded by a weak close on Wall Street .DJI .SPX.
Only 222 stocks are being included and, with a weighting of just 5 percent, they will account for only 0.73 percent of the Emerging Markets Index .MSCIEF.
MSCI estimated the change, due around the middle of next year, would drive inflows of between $17 billion and $18 billion. China’s market cap is roughly $7 trillion, Reuters reports.
