Rising bond yields support value stocks ahead of central bank meetings

Rising bond yields support value stocks ahead of central bank meetings

Bond yields climbed and stock markets held steady on Wednesday, as hopes of easing U.S.-China tensions and diminished risk of a no-deal Brexit prompted traders to take profit before key central bank meetings.

FILE PHOTO: A man walks past a stock quotation board outside a brokerage in Tokyo
FILE PHOTO: A man walks past a stock quotation board outside a brokerage in Tokyo December 4, 2013. REUTERS/Toru Hanai/File Photo

TOKYO: Bond yields climbed and stock markets held firm on Wednesday, as hopes of easing U.S.-China tensions and diminished risk of a no-deal Brexit prompted buying of out-of-favor value stocks before key central bank meetings.

Oil prices also firmed, underpinned by a big drop in U.S. crude stockpiles, after slipping the previous day.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.6per cent to hit a fresh 5-1/2-week high.

Pan-European Euro Stoxx 50 futures gained 0.2per cent in late Asian trade, indicating that European cash share markets will open slightly higher on Wednesday.

Stock investors around the world sustained their rotation into value stocks, representing a major reversal after many months of outperformance by growth shares such as tech companies.

Japan's Nikkei average climbed 1.0per cent, with the Topix Value index jumping 2.2per cent and the Topix Growth adding 1.1per cent.

The Shanghai Composite and the blue-chip CSI300 were down 0.3per cent and 0.7per cent, respectively, while Hong Kong's Hang Seng advanced 1.7per cent.

On Wall Street, the S&P 500 ended little changed as a rally in energy and industrial shares countered a drop in the technology and real-estate sectors with investors favoring value over growth.

"The sudden jump in value-oriented shares in the U.S. and elsewhere has all the hallmarks of position unwinding by major hedge funds," said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

"Such unwinding could continue for a few days but will likely end by the Fed's policy meeting."

Such reversals began last week after the announcement of U.S.-China trade talks in October and as the British parliament moved to prevent Prime Minister Boris Johnson from crashing the UK out of the European Union without a deal.

Position unwinding was also apparent in bond markets ahead of key central bank policy announcements, including the European Central Bank on Thursday and the U.S. Federal Reserve next week.

"Global bond markets are experiencing so-called momentum crashes," said Masanari Takada, cross-asset strategist at Nomura Securities, referring to a sudden and dramatic change in the direction of asset prices.

"Trend-following CTAs (Commodity Trading Advisers) were forced to square their long positions in major bond futures."

U.S. bond yields jumped on Wednesday, with the 10-year Treasuries yield rising more than 10 basis points to a one-month high of 1.745per cent.

It last stood at 1.714per cent in late Asian trade. The Japanese 10-year JGB yield rose 3 basis points to its one-month high of minus 0.200per cent, while the Australian 10-year yield rose more than 5 basis points to a six-week high of 1.147per cent earlier on Wednesday.

In Europe, Germany's 30-year benchmark bond yield briefly broke into positive territory on Tuesday for the first time since Aug. 5.

Investors had bought bonds for many weeks on expectations that the ECB will dole out stimulus, with a cut in interest rates of at least 10 basis points fully priced in.

Some traders also expect more measures including a deeper interest rate cut and a restart of its asset purchase program.

The Fed is also widely expected to deliver an interest rate cut next week.

Germany also signaled its readiness for relaxing its staunch opposition to deficit spending to support the economy, leading to speculation Berlin could issue more debt, and curbing appetite for German bonds.

Finance Minister Olaf Scholz said on Tuesday the country can counter a possible economic crisis by injecting billions of euros into the economy.

In the currency market, the dollar strengthened 0.2per cent to 107.795 yen, its highest in six weeks.

The euro was little changed at US$1.1047, while the British pound stood at US$1.2361 , near its six-week high of US$1.2385 hit earlier in the week.

Oil prices rose on Wednesday after an industry report showed that crude stockpiles in the United States fell last week by more than twice the amount that analysts had forecast. Prices hovered near their strongest in six weeks despite small losses on Tuesday after U.S. President Donald Trump fired national security adviser John Bolton.

The departure of Bolton, who took a strident stance against Iran, raised speculation of improvement in U.S.-Iran relations and an eventual return of Iranian crude exports to the market.

Still, the market was underpinned by Saudi Arabia's new energy minister's assurances of continued output cuts by the Organization of the Petroleum Exporting Countries.

In addition, geopolitical tensions in the Middle East are nowhere near subsiding after Israeli Prime Minister Benjamin Netanyahu announced his intention to annex a large swathe of the occupied West Bank, a move condemned by Arab League foreign ministers.

Brent crude futures rose 0.6per cent to US$62.76 a barrel while U.S. West Texas Intermediate (WTI) crude gained 0.7per cent to US$57.80 per barrel.

(Graphic: Asian stock markets - https://tmsnrt.rs/2zpUAr4)

(Editing by Stephen Coates, Jacqueline Wong and Muralikumar Anantharaman)

Source: Reuters