US dollar rally sees deep falls in equities, commodities, bond yields and the euro

Global equity markets slid on Tuesday while government bond yields crept lower and commodities plummeted. The euro fell to its 2003 lows as the US dollar reached a 12-year high in its latest advance.

Price action on Tuesday was marked by a plethora of global concerns that kicked off on Monday. Despite Wall Street marking the sixth year of its bull-market, the robust jobs report for the US in February pushed forward expectations of a rate hike by the Federal Reserve to as early as summer this year. That pushed the green back to outperform its rivals, particularly emerging market investors who were left wondering how to adjust currency-wise to a climate of rising US rates.

At the same time, last week’s cut to growth forecasts by the Chinese government, together with a raft of poor economic data, namely Tuesday’s drop in factory gate prices, reignited fears over deflation in the country and more importantly, the fallout of that being a reduction in demand for raw materials.

Commodity prices plummeted with copper, silver, platinum and palladium all registering losses of around 2% each. Oil prices also bore the brunt of the combo pain dealt by a strong US dollar and weakening Chinese economy with Brent down around about 3% and Nymex crude off by 2.6%.

The rout in commodity prices naturally weighed heavily on commodity-linked equities such as mining and energy stocks. That pressured shares for some of the biggest mining and energy companies in the world who are listed on London’s FTSE 100 market. BHP Billiton and Anglo American fell by more than 3% while Royal Dutch Shell and BG Group fell by more than 2%.

Elsewhere, Greek fears dominated the mood on Tuesday as policymakers in Europe and Greece’s new government continue to wrestle with the country’s obligations to pay debt. German finance minister Wolfgang Schäuble said that payment to Greece of the final instalment of its bailout is dependent on the full implementation of the current agreement. Separately, Jeroen Dijsselbloem, the Dutch finance minister who heads the eurogroup of his Eurozone colleagues, said Greece would not get the funds it wants without making an effort, Reuters reported.

Despite an accord last month to extend Greece's €172bn bailout into June, Athens is unable to access any of the remaining €7.2bn in the programme unless it agrees a reform programme with the three institutions formerly recognised as the "troika". But, the anti-austerity government in Greece continues to show unwillingness to adopt reforms, leaving the country’s outlook as precarious to say the least.

Unsurprisingly, that pushed the euro currency to get reacquainted with 11-year lows around the $1.07 mark, raising concerns in the market that the single currency is close to reaching parity with the US dollar. Analysts are now of the view that parity could be reached as early as the third quarter of this year as the European Central Bank finally launched its bond-buying programme which will create more money in the financial system.

In fixed income markets, government bond yields continued to compress on the ECB’s start of its latest scheme. The German 10-year Bund is offering a yield of 23 basis points, down 8 basis points to market another fresh record low. The French 10-year now offers a yield of 52 basis points, down 8 basis points.

“We are entering absurd levels. While there are no signs the bond rally is over, we suspect that bonds might need some pause to work off overbought conditions,” said KBC Bank.

“It seems that ECB bond purchases are still the main driver, but as equities were hit too, one cannot exclude some positive impact from sagging equities, even if we would qualify the equity decline more as a profit taking move following a breath-taking rally (especially in Europe),” added KBC.

In global equity markets, the Dow Jones Industrial Average in the US dropped 1.4% while the S&P500 declined 1.3%. In Europe, the hefty falls in mining and energy shares left the FTSE 100 nursing deep losses of over 2.5%. Germany’s DAX slid 0.7% and France’s CAC-40 lost 1.1%. The broader Stoxx 600 Europe index shed 0.8%. By contrast, volatility soared on with the CBOE's VIX index, a measure of expected moves in the S&P 500, rising 10% to 16.54.