On Tuesday, world shares declined and bond yields also fell from their recent highs, as the Australian central bank’s increase in interest rate by 50-basis points took the market by surprise. This gave rise to concerns about tightening monetary policy, just ahead of the European Central Bank (ECB) policy meeting and the US inflation data, scheduled for Thursday and Friday respectively. The interest rate hike by the Reserve Bank of Australia (RBA) is the highest seen in 22 years and the bank also warned of additional tightening measures, as it is battling high inflation numbers that has driven the Aussie up and also hit local shares.
There was a 0.3% fall in the MSCI benchmark index for global stocks, as it fell to 650 points because of weakness seen earlier in Asian markets and then fall in European stocks in early morning trading. Market analysts said that similar to the Australian central bank, others also want to hike up interest rates in order to tame the rising inflation. Policymakers want to be prepared in case growth sees a slowdown. Currently, there is a lot of uncertainty in the market, which is expected to continue for the next while. The volatility for both bonds and equities will be impacted with an increase in interest rates.
There was also a 0.5% fall in the STOXX 600 equity index and the derivatives market also saw a weak start to the day on Wall Street, with a 0.4% decline recorded in S&P 500 e-minis. Boris Johnson, the British Prime Minister, was able to survive a vote of no-confidence on Monday by a thin margin, but there was talk of replacing him that delved a blow to both gilts and the sterling. Analysts said that Johnson’s tenure as a leader is in doubt after the vote.
There was a drop of 1.8 basis points in the Treasury yield, after they had gained consecutively for the last six days. However, they managed to remain above the 3% threshold before the release of inflation numbers on Friday, which are expected to be high. If it does turn out to be high, it would mean that the US Federal Reserve will not hit the pause button when it comes to tightening monetary policy and could continue increasing the rates even after July. The European market also saw a dip in German bund yields, as they fell about 2 basis points.
However, they managed to hold onto the highs of Monday, with the European Central Bank (ECB) policy meeting to take place on Thursday. This is when the central bank is expected to discuss its plans of hiking up interest rates. Market analysts said that the risks of recession in the near term are declining and this gives central banks more room for hiking interest rates, which would give bond yield a boost as well. The yields have also gone up because of the recent inflation numbers and investors are looking forward to see if there will be another upside after the release of US inflation data on Friday.