Stocks, bond yields and commodities steamed higher on Thursday, February 15, while the dollar tumbled, as investors suddenly seemed to forget the inflation fears blamed for a brutal market sell-off in recent weeks.
Big gains for Wall Street [.N] and Asia overnight put MSCI’s 47-country world stocks index .MIWD00000PUS back in positive territory for the year and Europe’s main markets followed with 0.6 – 1 percent gains.
Economists were struggling to explain the turnaround except for the argument that historically it’s not unusual for stocks and bond market borrowing costs to rise in tandem with a rapidly expanding economy.
Some just blamed the weather and time of year. They speculated that strong U.S. inflation data on Wednesday that many had predicted could reignite the rout was probably distorted. They also said the looming Chinese New Year may have caused Asian traders to square up.
“For me it’s a clear indication that inflation is not as big a threat as people made it out to be over the past couple of weeks,” said Lukas Daalder, chief investment officer at Robeco in Rotterdam.
“The trend behind the market is still very strongly pointed upwards,” he added. “2017 was a very momentum-driven market, and if that’s still the case, which after yesterday it appears to be, then we will probably see new highs before too long.”
Just as big a puzzle as the rebound in stocks sentiment was the break down in correlation between rising U.S. bond yields and dollar.
U.S. Treasury yields on benchmark 10-year notes US10YT=RR hit a fresh four-year high of 2.94 percent which also dragged gap to 0.786 percent German Bunds <DE10YT=TWEB to its widest in 10 months.
Asia’s stocks rally overnight saw Australian shares climb 1.15 percent and South Korea’s KOSPI .KS11 added 1.1 percent. Japan’s Nikkei .N225 advanced 1.5 percent following three successive sessions of losses that took it to a four-month low the previous day, Reuters reports.
Volatility shrank back rapidly too. The VIX index .VIX – Wall Street’s “fear gauge” and a measure of market volatility – fell all the way back to 18, less than half the 50-point peak touched last week.
