Global bonds plunged for a second straight month in June, stocks tumbled and the dollar began to rebound as the Federal Reserve set a timetable for ending the stimulus that drove equities to record highs and debt yields to record lows. Emerging markets suffered as China created a cash squeeze and protests turned violent from Turkey to Brazil.
The $41 trillion of bonds in the Bank of America Merrill Lynch Global Broad Market index lost an average 1.4 percent in June. The MSCI All-Country World index of equities declined 3.1 percent as emerging markets erased 6.8 percent of their value. The Standard & Poor’s 500 fell for the first time in eight months. The U.S. Dollar Index ended 0.3 percent lower after falling as much as 3.5 percent.
U.S. central bankers could start reducing their $85 billion of monthly bond buying as soon as this year, Fed Chairman Ben S. Bernanke said June 19, prompting investors to recalibrate their outlook for economic growth. Stimulus efforts around the world have supported markets following the worst financial crisis since the Great Depression.
“The market had been pricing in that the Fed would normalize rates much more slowly than it has done historically, and clearly the market was taken aback,” Binky Chadha, the chief global strategist for Deutsche Bank AG, Germany’s biggest lender, said in a June 26 telephone interview. “That shock has spilled over across all of the asset classes. Everything is down.”
Markets were already on edge as the World Bank cut its global forecast on June 12 after emerging nations from China to Brazil slowed more than projected, while budget cuts and slumping investor confidence deepened Europe’s contraction.
The world economy will expand 2.2 percent, less than a January forecast for 2.4 percent and slower than last year’s 2.3 percent, the Washington-based bank said. It lowered its prediction for developing economies and said it sees the euro region’s gross domestic product shrinking 0.6 percent.
Bond losses in June as measured by the Bank of America Merrill Lynch index followed a 1.53 percent drop in May, capping the worst quarter on record with a 1.8 percent decline for the period in data going back to 1997. Fixed-income assets have dropped 1.27 percent this year, including reinvested interest, on track for the first annual decline since 1999, when they lost 0.26 percent. Yields have soared to 2.06 percent from May’s record low of 1.51 percent.
The firm’s index of sovereign debt dropped 1.14 percent in June. Yields on U.S. Treasuries, German bunds and U.K. gilts due in 10 years or more are all above year-end projections, based on surveys of economists and strategists by Bloomberg News.
Global corporate bonds from the neediest to the most creditworthy borrowers fell 2.48 percent. That brought losses for the year to 1.44 percent, prompting a slowdown in debt sales to $911.5 billion last quarter from $1.09 trillion in the first three months of 2013, data compiled by Bloomberg show.
The Bloomberg USD Emerging Market Composite Bond Index (BEM), which includes sovereign and corporate debt, declined 4.39 percent in June, capping its second consecutive quarterly loss.
“Our outlook is for the developed market selloff to proceed at a far more measured pace over the remainder of the year,” Seamus Mac Gorain, a strategist at JPMorgan Chase & Co. in London, wrote in a June 26 report. “The position squaring in emerging markets likely has some way to go, not least because the degree of illiquidity in the selloff has come as a surprise.”
DoubleLine Capital LP’s Jeffrey Gundlach, whose bond fund has beaten 99 percent of rivals, said June 27 in a webcast to investors that the “worst is over” for Treasuries as stability returns to the stock and fixed-income markets.
Bond yields and risk spreads were too low two months ago and “the Fed tilted over-risked investors to one side of an overloaded and over-levered boat,” Bill Gross, manager of the world’s largest mutual fund at Pacific Investment Management Co., said in a July investment outlook note posted on Pimco’s website the day before. “Stay calm and don’t panic.”
In the $4 trillion-per-day foreign exchange market, the Dollar Index, which IntercontinentalExchange Inc. uses to monitor the greenback against the currencies of six U.S. trade partners, rebounded from its lows on optimism the Fed may soon slow the pace at which it prints money to buy bonds for its quantitative easing stimulus.
While the index ended last month at 83.136, down from 83.375 at the end of May, it rallied from as low as 80.498 on June 19. The measure has risen 4.2 percent this year.
The South African rand rose the most last month among the 31 most-widely traded currencies against the greenback, appreciating 2.13 percent to 9.8806 per dollar. The yen rose 1.32 percent to 99.14 per dollar after falling to 103.74 in May, its lowest level in four and a half years.
India’s rupee fell the most in June, depreciating 4.86 percent to 59.3900 per dollar after touching 60.7650 on June 26, its weakest level ever. The euro rose 0.08 percent to $1.3010.
More than $2.7 trillion was wiped from global equities in June, as 44 out of 45 benchmark stock indexes tracked by the MSCI All-Country World index retreated. The measure, which includes stocks in 24 developed and 21 emerging markets, slumped 2.9 percent last month, after taking into account reinvested dividends, trimming its year-to-date gain to 6.4 percent.
The S&P 500’s decline in June ended a streak of seven monthly advances, the longest since September 2009. While the benchmark U.S. equity gauge is still up 13 percent this year, it tumbled 3.8 percent since reaching a record 1,669.16 on May 21.
“The markets needed to vent some steam, and they did,” Howard Ward, the chief investment officer at Rye, New York-based Gamco Investors Inc., which oversees $36.7 billion, said by e-mail. “Bernanke’s comments were interpreted to be more hawkish than he expected and provided a catalyst for an overdue correction. This coincided with the spike in overnight rates in China and investors rushed to the exits.”
The Shanghai Composite Index plunged 19.9 percent from its February high through June 27, close to the 20 percent threshold considered to be a bear market and bringing this year’s decline to 13 percent, as Chinese Premier Li Keqiang’s efforts to rein in shadow banking stoked the worst credit crunch in at least a decade.
The clamp-down on short-term borrowing sent the overnight repurchase rate to a record 13.91 percent on June 20, forcing the People’s Bank of China to provide financing to help stabilize money markets in the world’s second-largest economy.
In June, the nation’s companies made up five of the top 10 biggest losers in the MSCI Emerging Markets Index.
The gauge fell 6.8 percent in June, the most since May 2012 and its 11 percent tumble this year is the biggest for any first half since 2008. The index is trading at the cheapest level relative to stocks from developed economies since December 2009, according to data compiled by Bloomberg.
Turkey’s Borsa Istanbul 100 Index (XU100) lost 11 percent. Anti-government protests, sparked by anger over a planned development in Istanbul, spread nationwide in the most serious unrest during Prime Minister Recep Tayyip Erdogan’s decade in power.
In Brazil, protests erupted over an increase in bus fares and have spread across the country in the biggest demonstrations in the South American country in two decades. The Ibovespa (IBOV) index fell for a sixth straight month, declining 11 percent in June.
Malaysia’s 30-member FTSE Bursa Malaysia KLCI Index was the only benchmark measure to advance, climbing 0.2 percent, while Japan’s Nikkei 225 Stock Average, Ireland’s ISEQ Index and Hungary’s BUX stock index slipped no more than 1.2 percent.
Analysts cut their 2013 earnings estimates last month for emerging-markets stocks by 3 percent, Bloomberg data show. They lifted projections for profit this year by MSCI developed-market companies 0.2 percent and 0.1 percent for the S&P 500.
“We aren’t out of the woods,” Hayes Miller, who helps oversee about $48 billion as the Boston-based head of asset allocation in North America at Baring Asset Management Inc., said by phone on June 26.
“The emerging markets across the board are back to being cheap relative to developed markets,” Miller said. “But earnings expectations for EM continue to be downgraded fairly rapidly, while developed markets, particularly U.S. and not so much Europe, are seeing upgrades.”
The S&P GSCI Total Return Index of metals, fuels and agricultural products added 0.2 percent in June, bringing losses for the year to 5.4 percent. Silver futures plunged 12.6 percent, after dropping to $18.17 on June 28, the lowest level since August 2010. Copper tumbled 7.6 percent and aluminum declined 7 percent.
Gold prices dropped 11 percent in June, taking the quarterly decline to 23 percent, the most in data compiled by Bloomberg going back to 1920. Spot prices fell to $1,180.57 an ounce on June 28, the lowest since August 2010, before ending the month at $1,234.53.
Goldman Sachs Group Inc., Morgan Stanley and Credit Suisse Group AG cut their forecasts for the metal in June as investors sold 583 tons of gold from exchange-traded products this year, taking the holdings to a three-year low. Investors may sell an additional 285 tons in 2013, Societe Generale SA said in a June 17 report.
Unlike some other assets, gold doesn’t generate income and is vulnerable to higher interest rates, Georgette Boele, a commodities strategist at ABN Amro Group NV in Amsterdam, said by telephone June 27. “The weaker data out of China and concerns about emerging markets have also hurt the demand outlook.”
West Texas Intermediate crude oil rose 5 percent on the New York Mercantile Exchange in June, snapping two months of declines, partly as stockpiles fell at Cushing, Oklahoma, the delivery point for WTI futures.
Natural gas tumbled almost 11 percent last month amid rising output, the biggest decline since last August. Marketed U.S. gas production, which doesn’t include amounts flared or used to pressure wells, will rise to a record 70.01 billion cubic feet a day, the Energy Information Administration said in its June 11 Short-Term Energy Outlook.