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Government bond markets steady after turbulence

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Government debt steadied on Thursday and European and Asian stock bourses rallied, after upbeat Chinese trade data soothed investors’ nerves following a tumultuous trading session sparked by mounting fears over global growth.

Sovereign debt issued by countries ranging from the US to Germany and the UK stabilised after dramatic price rallies on Monday and Wednesday. Global fixed income markets gained more than 1 per cent on a total return basis over the first three days of the week, the second-strongest rise since the start of 2018, according to the broad Barclays index of high-grade debt.

The strong move was prompted by indications that some of the world’s leading economies are faltering amid a deepening trade dispute between the US and China. A further fall in US long-term yields below short-term ones — seen as a key recession harbinger — has also spooked traders.

Trade data released on Thursday by China, showing exports unexpectedly ticked up in July, helped to bolster sentiment, analysts said.

“Data from China offered some respite to the steady flow of poor economic data that is fuelling the current flight to safety,” said Derek Halpenny, analyst at MUFG.

Ken Cheung, a strategist at Mizuho Bank, added: “China trade figures in July were encouraging. This could help ease concerns over China’s growth outlook amid escalating trade war risk.”

The yield on the US 10-year note was stable in the European morning session at 1.721 per cent but has bounced back 13 bps from Wednesday’s trough. A Treasury auction on Wednesday afternoon Washington time drew tepid orders in a sign that demand for the safety of US government debt may be waning after the large rally.

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In Europe, German 10-year Bund yields rose, gaining 2.4bp to minus 0.557 per cent, while the yield on UK 10-year gilts added 3.4bp to 0.519 per cent. These bonds have been boosted both by their so-called haven appeal and also the spectre of further monetary accommodation on both sides of the Atlantic.

Equities in Europe took their cue from their Asian counterparts, enjoying some relief from recent losses. Europe’s benchmark Stoxx 600 opened 1 per cent higher, with Germany’s Dax up 0.9 per cent and France’s CAC 40 adding 1.2 per cent. London’s FTSE 100 rose 0.6 per cent. S&P 500 futures were pointing to gains of about 0.5 per cent when Wall Street begins trading later on Thursday, following a hectic day of trading that saw the index fall as much as 2 per cent at one point before rebounding.

China’s CSI 300 index of Shanghai and Shenzhen-listed names added 1.3 per cent, while Hong Kong’s Hang Seng index was up 0.7 per cent.

Both the onshore and offshore variants of China’s renminbi strengthened about 0.2 per cent, despite the country’s central bank setting the currency’s closely watched official midpoint below the seven-to-the-dollar point for the first time since 2008. However, renminbi “sentiment remains fragile given the elevated trade war risk”, Mr Cheung said.

Oil clawed back some of its recent losses, with Brent, the international marker for crude, up 2.9 per cent to $57.89.

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Via Financial Times

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