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Wednesday 21:10 GMT. World equities suffered sharp losses and highly rated government bond prices rose as the markets continued to look for guidance on the outlook for global central bank policy.
In particular, investors were keen for further clues as to when the Federal Reserve might begin scaling back its $85bn-a-month asset purchase programme. But there was also plenty of focus on the latest comments from Shinzo Abe, Japan’s prime minister, on his economic revitalisation strategy, as well as on Thursday’s European Central Bank policy meeting.
“Monetary policy is in a state of flux, not just in relation to the Fed ‘tapering’ debate but also the Bank of Japan, given Japanese government bond and equity volatility and the ECB’s search for non-quantitative easing-based stimulus,” said Divyang Shah, global strategist at IFR Markets.
“A Fed that is confident in taking its foot off the accelerator and ultimately moves toward tighter policy should be good for risk/equity markets. For bond markets it’s clearly a different matter.”
As such, the intense focus in the markets on economic releases, particularly in the run-up to Friday’s hugely important US non-farm payrolls report, was understandable.
Private sector jobs data from ADP showed payrolls rising by 135,000 last month, some way short of the consensus forecast. The Institute of Supply Management’s index of service sector activity came in slightly ahead of expectations, although the employment component was soft.
“Today’s US reports put a slight negative spin on Friday’s jobs outlook,” said Mike Englund at Action Economics.
But Dan Greenhaus, chief global strategist at BTIG, noted that the ADP reading had come in below the official NFP figure in eight of the past 10 months, with an average miss of about 37,000 jobs.
“Of course, that doesn’t mean we should add 37,000 to today’s number to guesstimate Friday’s report but it does suggest that Friday’s number may still come in roughly in line with consensus, which is for private sector job growth of 175,000.”
The Fed’s “beige book” report on the economy, meanwhile, offered little in the way of fresh insight. It suggested that overall activity growth continued at a “modest to moderate” pace.
Equity markets saw significant selling. On Wall Street, the S&P 500 fell 1.4 per cent, while the Dow Jones Industrial Average closed below the 15,000 level. The FTSE Eurofirst 300 index fell 1.5 per cent to a six-week low.
And there were further sharp losses for Japanese stocks as the Nikkei 225 tumbled 3.8 per cent to its lowest close for two months – taking its decline from a five-year high on May 23 to more than 18 per cent.
Mr Abe officially launched the “third arrow” of the policies collectively known as “Abenomics” – structural reforms aimed at lifting nominal GDP growth to an average of 3 per cent over the next 10 years.
Analysts were disappointed at the lack of fresh detail and suggested investors might be becoming sceptical about Abenomics.
“Following several months of post-election euphoria, the optimism surrounding Japan’s new order may be starting to fade,” said Christian Lawrence at Rabobank.
The slide in the Nikkei sent risk-averse investors rushing for Japanese government bonds and the yen. The yield on the 10-year JGB fell 2 basis points to 0.86 per cent, while the dollar sank back below Y100.
US and German government bond prices also rose, with the yield on the 10-year US Treasury down 6bp at 2.09 per cent and that on the Bund falling 3bp to 1.51 per cent.
The euro was flat against the US currency in spite of disappointing eurozone service sector data. The ECB is widely expected to keep policy steady at its meeting.
Gold was helped by the dollar’s modestly weaker tone, rising $3 to $1,402 a troy ounce. Industrial commodities were mixed, with copper unchanged in London at $7,455 a tonne and Brent oil settling 20 cents lower at $103.04 a barrel.
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