World shares sank on Monday as expectations for faster economic growth and inflation battered bonds and boosted commodities, while rising real yields made equity valuations look more stretched in comparison.
MSCI’s All Country World Index, which tracks shares across 49 countries, was down 0.4% after the start of European trade.
The pan-European STOXX 600 index was down 1%, at its lowest in 10 days. Germany’s DAX, France’s CAC 40 and Spain’s IBEX 35 index fell 1% each, Britain’s FTSE 100 lost 0.85% and Italy’s FTSE MIB index fell 0.9%.
S&P 500 futures fell to their lowest since Feb. 4, down 1% on the day.
Bonds have been bruised by the prospect of a stronger economic recovery and greater borrowing as President Joe Biden’s $1.9 trillion stimulus package progresses.
Federal Reserve Chair Jerome Powell delivers his semi-annual testimony before Congress this week and is likely to reiterate a commitment to keeping policy super easy for as long as needed to drive inflation higher.
“The coming week is relatively thin on the international data agenda, but after the recent rise in long bond yields, Fed Chairman Powell’s hearings in both chambers of Congress (Tuesday / Wednesday) will be attracting great interest,” said Elisabet Kopelman, U.S. economist at SEB.
“The fact that the most recent rise in long bond yields has been driven by higher real interest rates and not just inflation expectations increases the probability of a dovish message.”
European Central Bank President Christine Lagarde is also expected to sound dovish in a speech later Monday.
Yields on 10-year Treasury notes have already reached 1.38%, breaking the psychological 1.30% level and bringing the rise for the year so far to a steep 43 basis points.
Analysts at BofA noted 30-year bonds had returned -9.4% in the year to date, the worst start since 2013.
“Real assets are outperforming financial assets big in ‘21 as cyclical, political, secular trends say higher inflation,” the analysts said in a note. “Surging commodities, energy laggards in vogue, materials in secular breakouts.”
Earlier in Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan went flat, after slipping from a record top last week as the jump in U.S. bond yields unsettled investors.
Japan’s Nikkei recouped 0.8% and South Korea 0.1%, but Chinese blue chips lost 1.4%.