The rout in risky assets continues. Global stocks have slumped 3.5 percent in the past three days, leaving the MSCI All Country World Index a little over 1 percent from a bear market. Investors are fleeing to developed market government bonds with the yield on the Bank of America Merrill Lynch World Sovereign Bond Index tumbling to 1.29 percent, the lowest since records began in 2005. European stocks fluctuated between losses and gains after Deutsche Bank reassured investors and employees that it has enough funds to pay coupons on its riskiest debt.
Japan's Nikkei 225 Index sank the most since June 2013 as the rising yen hurt shares of exporters like automakers Toyota, Nissan and Mazda. The yen rose to the highest against the dollar since November 2014, consolidating its position as the best performing major currency in 2016. It seems central banks have, at least for the moment, lost the ability to weaken their currencies through looser policy. Since the Bank of Japan introduced negative interest rates for the first time on Jan.29, the yen has risen 3 percent against the dollar. The Nikkei 225 Index has slumped 8 percent in that time. The BoJ move - coupled with global risk aversion - pushed the yield on the nation's benchmark 10-year bond below zero today for the first time. The Nikkei has plummeted 15 percent in 2016 and entered a bear market in January.
The U.S. 10-year yield fell to 1.68 percent, the lowest since February 2015, and is now 30 basis points above the record low reached in July 2012. As Fed chair Janet Yellen prepares to testify before Congress on Wednesday and Thursday, the odds of a U.S. interest rate hike in December have slumped to 30 percent, according to Bloomberg data. On Friday, after the release of the U.S. jobs report which showed a bigger-than-expected pickup in wages, the probability stood at 53 percent. There is now a zero percent chance of a move in March, compared with 51 percent odds at the end of 2015. Inflation expectations in the U.S., as measured by the difference between yields on 10-year notes and Treasury Inflation Protected Securities, have fallen to 1.22 percent, the lowest since April 2009.
Gold is enjoying its longest winning streak since July 2011, extending its 2016 rally to 12 percent. The precious metal is hovering below $1,200 an ounce, after briefly rising above the threshold on Monday, and is now trading at its highest since June 2015. As the odds lengthen The Fed will hike rates this year and financial market turbulence persists, gold's appeal has increased. Goldman Sachs warns the winning run won't last. It forecasts the Fed will raise rates to 1.3 percent in 2016 and gold will trade at $1,000 by the end of the year. Higher rates curbs its attraction because the metal doesn't pay interest like other assets such as bonds. Goldman Sachs also says the U.S. economy will still grow above-trend this year, boosting inflation expectations. Gold's 2016 rally comes after three years of losses, the worst run since 2000.
Mark Barton is a presenter on Bloomberg TV. Follow him on Twitter @markbartontv