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London - Caution prevails as the week draws to a close, with global stocks headed for their biggest two-day decline in a month and bond yields at record lows as investors gird themselves for potentially seismic events this month.
The MSCI All-Country World Index pared its fourth weekly advance. Bonds rose, sending yields from Japan to Germany to all-time lows, before next week’s Federal Reserve meeting and Britain’s referendum on European Union membership later in the month.
Rates on investment-grade corporate debt in euros were also near lows following purchases by the European Central Bank. Oil led commodities lower.
Optimism that drove US stocks to a 10-month high this week may have peaked before meetings by the Fed and the Bank of Japan, Britain’s vote and US political conventions, all of which have the potential to roil markets. While policy makers have done what they can with stimulus to shore up economies, they’ve pushed yields lower, hurting earnings prospects for banks.
European shares have fallen every day since the ECB’s corporate bond-buying program started on Wednesday.
"Nobody wants to stay in the market with so many things coming up: the Fed, BOJ, Brexit vote," said Benno Galliker, a trader at Luzerner Kantonalbank in Lucerne, Switzerland.
"Everybody seems angry about this market. It really looked like we could go to the upside but now in Europe it seems everything is falling apart."
Stocks
The MSCI world index lost 0.6% at 7:15 a.m. in New York. It reached a six-month high mid-week as the S&P 500 came within 0.6% of a record. The gauge of global equities is still heading for a 0.2% weekly advance, while the US measure has climbed 0.8%, also set for a fourth week of gains.
The Stoxx Europe 600 Index has been struggling for the past two weeks and slipped 1.8% on Friday, down for a third consecutive day for the first time since the beginning of May. All but 13 of the 600 companies retreated, with banks and insurers leading the drop. Deutsche Lufthansa fell 4.5% after announcing the surprise departure of chief financial officer Simone Menne.
Futures on the S&P 500 Index lost 0.6%, following a 0.2% retreat in the US benchmark. The index - which remains about 1 percent away from its record high - clawed back declines of as much as 0.5% on Thursday as gains in utilities and telephone companies countered losses among banks and mining shares.
Hong Kong’s Hang Seng China Enterprises Index retreated 2.2%, dragged down by a decline in financial companies as trading resumed after a local holiday.
Mainland Chinese markets will reopen on Monday, when May data for industrial output and retail sales are due. Next week, MSCI will decide whether to include mainland a shares in its international indices.
Bonds
Japan’s 10-year bond yield slid to minus 0.155%, while Germany’s 10-year bund yield touched 0.02%. The yield on the Bloomberg Global Developed Sovereign Bond Index dropped to a record 0.6% on Thursday and has returned 10% in 2016, headed for its biggest gain in data starting in 2010. Treasury 10-year note yields fell three basis points to 1.65%, headed for the lowest close since January 2015.
Investors are "plumping for the safety of core government bonds," said Nick Stamenkovic, a strategist at broker RIA Capital Markets in Edinburgh. "Treasuries look set to remain well underpinned near-term as the Fed likely signals no early tightening at June’s meeting and uncertainty persists ahead of the EU referendum."
Russian bonds gained after the central bank cut interest rates, sending the 10-year yield down four basis points to 8.64%, the lowest since July 2014.
The average yield on highly rated company bonds in euros dropped to 0.96%, according to a Bank of America Merrill Lynch index. The ECB has started buying corporate bonds this week, including notes issued by Volkswagen, Telecom Italia SpA and power company Engie SA, according to people familiar with the situation who asked not to be identified because they aren’t authorized to discuss the information.
Borrowing costs for junk-rated companies in euros have also declined, with yields falling 10 basis points this week to 4.6%, according to Bank of America Merrill Lynch index data.
Commodities
The Bloomberg Commodity Index, which tracks returns on raw materials, is down for a second day, the first two-day decline since May 24. The gauge dropped 0.4%, trimming the weekly gain to 2.7%. It’s headed for a fifth weekly advance in the longest rally in more than two years.
West Texas Intermediate crude fell 1.3% to $49.93 a barrel, trimming its fourth weekly advance in five to 2.7%. US inventories fell by 3.23 million barrels last week to a two-month low, the third straight drop, government data showed on Wednesday. Wildfires in Canada curtailed oil-sands production, with lost output estimated at less than 1 million barrels a day.
Currencies
The yen strengthened against all of its 16 major peers, advancing 0.3% versus the dollar as investors sought haven assets.
The Bloomberg Dollar Spot Index, which tracks the greenback against 10 counterparts, rose for a second day, adding 0.2% after rallying 0.4% on Thursday. The gauge is headed for a second straight weekly decline, down 0.2%.
The Fed decision is due on June 15, while the BOJ convenes the following day.
Sterling headed for its second weekly decline versus the dollar before the UK votes on June 23 on whether to remain in the EU. Implied volatility for one-month options on the pound versus the dollar rose to 23.5% the highest since January 2009, and more than double the level at the end of April.
Expectations for price swings have climbed every week since the period ended April 29, the longest streak of increases since late February.
The MSCI Emerging Markets Currency Index dropped 0.3%. The regional currency gauge is still up 1.4% this week, the best performance in two months.
South Africa’s rand led declines, losing 1.7%, and Turkey’s lira slid 0.9%. South Korea’s won halted a five-day advance, retreating 0.8%.
