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Wall Street rallies to biggest one-day rise since June

Global stocks bounced back and government debt rallied on Monday after last week’s turbulent trading, triggered by worries over the possibility of a breakneck economic expansion and the possibility of central banks tightening monetary policies.

Wall Street’s blue-chip S&P 500 index rose 2.4 per cent, its biggest one-day gain in almost nine months and enough to erase almost the entirety of last week’s declines. The technology-focused Nasdaq Composite climbed 3 per cent. Small-cap stocks advanced even further, with the Russell 2000 up 3.4 per cent — on track for its best daily performance since early January.

In Europe, the region-wide Stoxx 600 closed up 1.8 per cent, while both London’s FTSE 100 and Frankfurt’s Xetra Dax indices ended the session 1.6 per cent higher.

The gains for global equities came as core government debt on both sides of the Atlantic rallied. The yield on the 5-year US Treasury, which was at the centre of the market tumult last week, fell 0.03 percentage points to 0.70 per cent on Monday, while the yield on Germany’s 10-year Bund slid 0.07 percentage points to minus 0.34 per cent.

There was less enthusiasm for the benchmark 10-year US Treasury note, which had rallied sharply on Friday. The yield rose 0.03 percentage points to 1.43 per cent, although well below the 12-month high of 1.61 per cent reached last week.

“It’s all about bonds,” said Willem Sels, chief investment officer at HSBC’s private bank, who said expectations for a continuation of “ample” stimulus measures from global central banks provided a “powerful” boost for risk assets.

That thesis came into play on Monday when Australia’s central bank said it would purchase A$4bn ($3bn) in long-term bonds, double the usual amount, as it attempted to ease a heavy sell-off that had hit its markets. The Reserve Bank of Australia had sharply increased its purchases of short-term bonds last week as Australian sovereign debt endured successive waves of intense selling.

The Australian 10-year yield tumbled roughly 0.25 percentage points on Monday to 1.67 per cent, according to Bloomberg. It marked the biggest rally since a period of turbulent trading in global financial markets in March last year.

Elsewhere in the region, Japan’s Topix index closed up 2 per cent, while Australia’s benchmark S&P/ASX 200 climbed 1.7 per cent. China’s CSI 300 index of Shanghai and Shenzhen-listed stocks ended the session 1.5 per cent higher and Hong Kong’s Hang Seng added 1.6 per cent.

Volatility in global debt and equity markets has been stoked by widening concerns that a broad economic recovery from the pandemic could spur inflation, prompting central banks to withdraw unprecedented monetary policy support.

“Global real yields could rise further,” said Robert Buckland, chief global equity strategist at Citigroup. “This is bad for equity markets, especially those tilted towards highly rated growth stocks.”

He said this was particularly so in the US, where the valuations of big tech companies had been buoyed by low interest rates.

While low rates increase the current value of tech groups’ future cash flows, the present value of future earnings falls if rates rise.

Inflation expectations were heightened at the weekend when the US House of Representatives passed President Joe Biden’s $1.9tn coronavirus stimulus package, months after earlier support measures expired.

“Last week was an excellent reminder of a very important lesson — the bond market matters,” said Gregory Perdon, co-chief investment officer at Arbuthnot Latham. “But if stimulus cheques get into the hands of Americans fast enough, maybe we will be able to kick the can a little bit further down the road.”

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