stock market: Global equity rally pauses as bonds hold surge

Asian stocks dipped Friday and US futures were steady as a global equity rally paused. Sovereign bonds held gains after investors scaled back expectations for monetary-policy tightening to quell inflation.

Shares fell in Japan and Hong Kong, where developer Kaisa Group Holdings Ltd. and its Hong Kong-listed units were suspended from trading in the latest sign of stress from China’s troubled property sector. S&P 500, Nasdaq 100 and European futures fluctuated after tech shares led Wall Street to a record high.

Treasuries and the dollar held a climb. A surprise Bank of England move to hold interest rates spurred a global surge in bonds as investors reviewed the outlook for borrowing costs. Interest-rate futures had priced in two quarter-point Federal Reserve increases in 2022 but shifted the second one toward 2023. Jerome Powell this week said the Fed can be patient on hikes.

Crude oil advanced. Saudi Arabia and its OPEC+ allies rebuffed US President Joe Biden’s pleas for a large production boost. That leaves Biden with the option of tapping the US strategic reserve.

The focus turns to the US jobs report due Friday since the level of progress on employment could shift views on monetary policy again, heralding further volatility in the bond market. Stocks are riding out such gyrations so far: solid US earnings appear to have reassured investors that the economic recovery can weather pandemic-related supply chain and labor disruptions.
“You have to stay away from bonds at the moment,” Nancy Tengler, chief investment officer at Laffer Tengler Investments, said on Bloomberg Television. While there is a “little bit of a rally going on” in fixed income, “it’s difficult to see a way clear to make a lot of money, especially when real rates are negative,” she said.

Elsewhere, Australia’s central bank in a quarterly update of forecasts dismissed the prospect of a rate increase in the next 12 months, further pushing back against market expectations of a tightening cycle starting next year.

Meanwhile, China’s government bonds were set for their biggest weekly advance since July after the nation’s central bank increased its injection of short-term cash.

The latest US data showed unemployment benefits fell to the lowest since March 2020. Friday’s employment report is forecast to show nonfarm payrolls rose by 450,000 in October. Traders are likely to watch out for wages growth.

“The narrative around wage growth and very strong job creation suggests to me we are nowhere out of the woods in seeing higher bond yields going into next year,” Sean Darby, chief global equity strategist at Jefferies, said on Bloomberg Television.