Friday 21:05 BST. Global equities adopted a cautiously positive tone at the end of a week that saw US government bond yields reach two-year highs and emerging market assets hit by heavy selling, amid growing expectations that the US Federal Reserve would soon begin scaling back its quantitative easing programme.
The S & P500 equity index rose 0.4 per cent, giving it a weekly gain of 0.5 per cent. Across the Atlantic, the FTSE Eurofirst 300 rose 0.4 per cent on Friday but suffered a weekly decline of 0.3 per cent. In Tokyo, the Nikkei 225 saw sharp swings over the week, culminating in a 2.2 per cent jump on Friday – leaving it just 0.1 per cent higher over the five-day period.
Wall Street’s advance on Friday came as the 10-year US government bond yield retreated from a two year-high of 2.94 per cent struck on Thursday to 2.82 per cent – down 7 basis points on the day and flat on the week – partly on the back of disappointing US housing market data.
US new home sales tumbled 13.4 per cent in July – although analysts highlighted that the data were erratic and subject to large revisions.
Nevertheless, the gold price jumped $20 to a two-month high of $1,396 a troy ounce – for a weekly advance of $19.
German sovereign debt also sold off over the course of the week and the Bund yield rose 1bp on Friday to 1.94 per cent for a 4bp gain over the five-day period.
Preliminary eurozone purchasing managers’ data for August offered further evidence that the region’s economy was picking up pace.
In a similar vein, growth bulls were impressed by the “flash” reading of the HSBC-Markit manufacturing PMI for China, which reached its highest level for four months.
The prospect of increased demand for metals and other industrial commodities offered support to copper, which finished the week at $7,360 a tonne in London – up slightly on the day but marginally lower over the week. Brent oil settled at $111.04 a barrel, up $1.14 on the day and 64 cents on the week.
Meanwhile, the minutes of the Federal Reserve’s July policy meeting did little to change expectations that the US central bank would begin “tapering” its asset purchases as soon as next month.
Such expectations have driven the 10-year Treasury yield up from just 1.63 per cent at the start of May – and increasingly undermined sentiment towards emerging market assets.
“This move in US rates has strengthened investor expectations that the previous capital flows to emerging markets may return back to developed markets, attracted by the higher yields and better earnings growth prospects,” said Koon Chow, strategist at Barclays.
“Intuitively, the EM economies with the greatest need for the continued inflows of savings from abroad should be under the most pressure. In the past week, current account deficit currencies were hit the hardest, although most EM currencies also fell.”
Indeed, the Indian rupee was one of the biggest casualties of the week as it touched a succession of record lows against the dollar – before rallying slightly on Friday. The MSCI Emerging Market equity index, meanwhile, rose on Friday for the first time in seven sessions.
Samarjit Shankar, managing director of global strategy at Bank of New York Mellon, said that flow indicators were indicating a willingness on the part of investors to cautiously – and selectively – move back into oversold EM assets.
“While there is undoubtedly a tactical element to the renewed forays into riskier exposure, we believe real money managers are also beginning to look beyond the ongoing debate over the direction of US monetary policy,” he said.
The latest wave of EM selling prompted many in the markets to draw comparisons with the Asian financial crisis of 1997-98, which provided a significant shock to the world economy.
But most felt the current turmoil – while serious – was unlikely to have such a severe effect.
“This time, emerging markets seem able to avoid the wave of defaults and devaluations they registered in the past,” said Philippe Ferreira, strategist at Société Générale.
“They adopted flexible exchange rate regimes in the late 1990s and built up comfortable buffers during the commodity boom of the past 10 years.”
“Nevertheless, we expect EM assets will continue to underperform developed market assets as the Fed retrenches in coming quarters.”
The dollar may have enjoyed a strong week against emerging market currencies, but it did less well elsewhere.
The dollar index was marginally higher over the week, although the US unit lost ground against the euro.