Asian stocks drop as bond market sell-off ripples into equities

Stocks across Asia-Pacific dropped on Wednesday as a recent climb in US bond yields put high valuations of growth stocks under pressure.

Japan’s Topix index closed 1.8 per cent lower, dragged down by tech stocks. Hong Kong’s Hang Seng index closed 3 per cent lower, its worst performance in nine months, with losses in tech, consumer cyclical and energy shares exacerbated by a local media report that the territory would raise its stamp duty on equity trading. The article was later removed. China’s CSI 300 index fell 2.6 per cent.

The yield on the benchmark US Treasury bond receded by 0.03 percentage points to just under 1.34 per cent, but remained at around its highest since the US and other Western nations implemented their first coronavirus lockdowns in March last year.

Government bonds have sold off since January when the Democratic party won control of the US Senate and US president Joe Biden’s pledge to spend $1.9tn on coronavirus relief stoked fears of rising inflation in the world’s biggest economy. Inflation erodes the cash value of bonds’ income payments.

That drop in Treasury prices raised the yields on the low-risk government debt, denting the allure of riskier equities.

“When bonds yield close to zero, you are not losing out by investing in those companies whose cash flows could be years into the future,” said Nick Nelson, head of European equity strategy at UBS.

“As bond yields start to rise, that cost of waiting [for companies’ earnings growth] increases.”

Nelson said European equities were less vulnerable to rising bond yields than those in Asia and the US, because European stocks traded on lower valuations in general. “We have fewer big technology companies here,” he said.

Europe’s Stoxx 600 index is trading at around 22 times companies’ trailing earnings, compared to 52 times for China’s CSI 300 and 30 times for the US S&P 500.

On Wednesday, morning, the Stoxx gained 0.2 per cent and Germany’s Xetra Dax rose 0.5 per cent. The UK’s FTSE 100, which contains a large number of companies that make their revenues overseas, fell by 0.6 per cent as sterling strengthened against the dollar.

The pound added 0.4 per cent to $1.471, boosted by a promise by prime minister Boris Johnson that the end of coronavirus restrictions was in sight and prospective improvements to the UK’s testing regime.

A faster than expected return to normal would boost the UK’s services-driven economy, which has been hit harder by the virus than other developed nations.

“The UK is well positioned for a near-term rebound,” economists at Goldman Sachs commented in a research note, citing the rapid progress of the nations’ vaccination programme alongside sharp falls in infection rates during the latest lockdown. “There is still room for sterling to outperform as the recovery gains momentum.”

Overnight in the US, the benchmark S&P 500 and the tech-focused Nasdaq Composite fell as much as 1.8 and 3.9 per cent, respectively, before recouping losses following comments by Jay Powell, the Federal Reserve chair, that the central bank would maintain heavy support for the economy.

Futures markets indicated the S&P 500 would fall 0.1 per cent when Wall Street trading begins, while the top 100 stocks on the technology-focused Nasdaq Composite would lose 0.2 per cent.

Oil prices were steady, with Brent crude, the international benchmark, at $65.42 a barrel.