Global stock sell-off deepens as reflation trade unravels

Global shares sank as a sell-off ignited by a hawkish shift in the US central bank’s stance on inflation deepened in Asia on Monday.

Japan’s Topix index dropped 2.6 per cent in early trading in the region while Australia’s S&P/ASX 200 shed 1.9 per cent. Hong Kong’s Hang Seng index fell 1.4 per cent and South Korea’s Kospi fell 1.1 per cent.

Those falls followed the worst week for Wall Street’s S&P 500 stock benchmark in almost four months. The sell-off was prompted by comments from Federal Reserve chair Jay Powell on Wednesday that signalled the central bank could raise rates to tame inflation sooner than investors had previously thought, rather than maintain supportive policy indefinitely.

The sudden shift sent investors fleeing from shares favoured in the so-called “reflation trade”, or those that benefit from higher inflation, which has dominated markets since the launch of Covid-19 vaccination drives late last year.

Futures for the S&P 500 were 0.5 per cent lower in Asian trading on Monday, while those for London’s FTSE 100 were down 0.8 per cent. The S&P 500 slid 1.3 per cent on Friday.

Market sentiment was also hit by comments from James Bullard, president of the St Louis Fed, who suggested the US could raise rates as early as late 2022 in the event of higher-than-expected inflation. The Fed also flagged last week that it would soon begin discussing when to taper its $120bn monthly bond purchases.

“This looks like a market that got too invested in the prior Fed story, which it may have taken far too literally,” said Robert Carnell, head of Asia-Pacific research at ING. “Central banks don’t seem to be able to control the reality shock that hits markets when a more reasonable version of future events is revealed to them”.

“Surprised investors may cut reflation trades further in the near-term,” added Mansoor Mohi-uddin, chief economist at Bank of Singapore. “But falling inflation expectations will let the Fed only taper in 2022, helping sentiment recover over the summer.”

In bonds, the yield on the 30-year US Treasury fell 0.02 percentage points to 1.99 per cent on Monday, marking the first drop below 2 per cent since February as pressure mounted on reflation trades.

Commodities prices stabilised after tumbling last week. Brent crude, the international oil benchmark, rose 0.4 per cent to $73.82 a barrel. US marker West Texas Intermediate rose 0.5 per cent to $72.03.

In China, the CSI 300 index of Shanghai- and Shenzhen-listed shares slipped 0.6 per cent after banks left the country’s benchmark loan prime rate on hold. Lenders benchmark new loans against the rate.

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