Global markets: End of easy money? Euro surges, bond yields gain

As euro zone bond yields rallied, euro surged to as high as $1.1435

The euro surged to its highest in over a year on Thursday, while sterling, bond yields and global shares also climbed, as a slew of hawkish comments from central banks signalled the era of easy money might be coming to an end not only in the United States.

The dollar touched its lowest since October — before Donald Trump was elected US president — against its broad index, as investors shifted to the view that the US Federal Reserve might not be the only game in town when it comes to higher interest rates.

With the Fed's clearing of all banks in the second part of its stress tests, financials led global stocks to record highs. Worries over the impact of tighter monetary conditions on share prices were offset by confidence in robust global growth as central banks move towards normalisation.

Wall Street was to open higher again after the S&P 500 scored its biggest one-day percentage gain in two months in the previous session.

As euro zone bond yields rallied, the euro surged to as high as $1.1435, its strongest since May 2016.

"If all central banks sound hawkish at the same time then divergence, and therefore FX volatility, will stay low," Deutsche Bank currency strategist George Saravelos wrote in a note to clients.

"The problem with this convergence, however, is that the Fed is already in tightening flight mid-air with other central banks just about to take off the runway. With the next big question for the market the timing of a Fed 'landing', hawkish co-ordination in such an environment can do serious damage to the dollar," he added.

In Britain, Bank of England Governor Mark Carney surprised many this week by conceding a hike was likely to be needed as the economy came closer to running at full capacity. Chief economist Andy Haldane took a similar line on Thursday, saying the BoE needed to "look seriously" at hiking rates.

That sent sterling surging above $1.30 for the first time in five weeks, leaving it close to its highest levels in nine months.

The Bank of Canada went further, with two top policymakers this week suggesting they might tighten as early as July.

And that followed comments earlier in the week from European Central Bank President Mario Draghi, who said stimulus might need to be toned down so it does not become more accommodative as the economy recovers.

Arresting Deflation

ECB sources had tried to hose down talk of tightening, telling Reuters on Wednesday that markets had over interpreted Draghi's comments. But those comments could not prevent Germany's 10-year government bond yield hitting a five-week high while other bond yields also climbed higher.

"This is simply the central banks getting together and trying to arrest deflation," said Nomura's head of G10 currency trading Peter Gorra.

US 10-year Treasuries were also up 16 basis points so far this week at 2.28 percent.

European shares failed to hold onto early gains, slipping a little as utilities and construction stocks, which tend to suffer from the prospect of higher interest rates, edged lower.

Shares in Europe's banks, however, rose for a fourth straight day, up 14 per cent by 1200 GMT.

Earlier, Japan's Nikkei added 0.45 per cent while MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.8 per cent to its highest since May 2015.

The dollar's fall boosted emerging stocks.

"Central banks will be very cautious in their approach," said Martin Whetton, a senior rates strategist at ANZ.

"But once they start tightening in concert, and their bloated balance sheets start unwinding, it is fair to say that bonds, equities, house prices and other asset markets will face stiffer headwinds than they have for a long time."

The euro also surged to a 16-month top on the yen, as investors doubted the Bank of Japan would be in any position to begin winding back its stimulus for a long time to come.

Crude oil rose for a sixth straight session on a decline in US output, hitting a two-week high after a decline in weekly US production eased concerns about deepening oversupply.