- The rollout of vaccines, slowing of infections and Joe Biden's impending huge US stimulus are proving to be a double-edged sword for traders.
- Alarm bells have been ringing for weeks as the yield on benchmark 10-year US Treasuries climbed to one-year highs.
- Yields have advanced in other parts of the world, sparking a hefty sell-off in New York as all three main indexes tanked.
Equity markets were pummelled Friday, on growing fears that an expected strong global economic recovery this year will fan inflation and force central banks to hike interest rates, despite reassurances that ultra-loose monetary policies will be kept in place for as long as needed.
The rollout of vaccines, slowing of infections and Joe Biden's impending huge US stimulus are proving to be a double-edged sword for traders as they weigh the much-needed return to pre-pandemic life with the prospect that prices will soar.
And there is a worry this would threaten one of the key pillars of the rally on world markets from their March nadir — record-low borrowing costs and a vast bond-buying programme.
Alarm bells have been ringing for weeks as the yield on benchmark 10-year US Treasuries climbed to one-year highs as investors moved out of the safe havens -- yields rise as prices fall -- and on Thursday a better-than-expected read on US jobless claims pushed them up further.
Yields have also advanced in other parts of the world, including Australia, France and Germany, New Zealand and even Japan, which has struggled for decades to fire inflation.
That sparked a hefty sell-off in New York as all three main indexes tanked -- led by the Nasdaq's 3.5 percent plunge as tech firms are more susceptible to higher interest rates.
And Asia followed suit, suffering one of its worst sessions since the dark days of last March's collapse.
Tokyo led the way, tanking four percent, while Hong Kong and Mumbai were more than three percent off and Seoul shed 2.8 percent. Sydney and Shanghai also lost more than two percent while Singapore and Jakarta gave back more than one percent.
"Markets have become myopically fixated on inflation," said OANDA's Jeffrey Halley. "The expectations being that we will see an explosion in demand as vaccines reopen developed market economies. The fact is, data has shown we have seen an increase in demand anyway up till now, despite the pandemic walls erected globally."
The selling comes despite constant reassurances from Federal Reserve officials, led by boss Jerome Powell, that they are not worried about inflation and the rise in Treasury yields is a sign that the economic outlook is bright -- and rates will not rise for the foreseeable future.
"With the US economic outlook boosted by pandemic improvement, vaccine distribution and the prospects of President Biden's fiscal package getting through Congress, investors are now fixated on the risk of inflation and economic overheating," said Tai Hui, at JP Morgan Asset Management.
"Investors may not be fully convinced by the Federal Reserve's commitment to keep monetary policy loose for an extended period.
"The likely rise in headline inflation, partly due to the low base from 12-months ago, could challenge this dovish view, even though we agree that sustained demand-side inflation pressure is still some quarters away."
He added that the rise in yields "serves as a trigger to investors who have been looking for a reason for an equity market correction. Volatility will continue but this could provide an interesting opportunity for investors to reload on equities".
And Silvia Dall'Angelo at fund manager Federated Hermes added: "Central banks' liquidity will continue to flow abundantly throughout 2021 at least, yet it's unclear whether markets can ever get enough of it."
In Washington, the House is expected to vote on Biden's enormous economic rescue package later in the day, though his hopes of including a $15-an-hour minimum wage in it were dealt a blow Thursday when an official said it could not be passed using a simple majority in the Senate.
Still, the vast majority of the $1.9 trillion package -- which does include $1,400 cash handouts -- is expected to get through Congress and be signed by the president later in March.
- Tokyo - Nikkei 225: DOWN 4.0 percent at 28,966.01 (close)
- Hong Kong - Hang Seng: DOWN 3.2 percent at 29,115.79
- Shanghai - Composite: DOWN 2.1 percent at 3,509.08 (close)
- Euro/dollar: DOWN at $1.2150 from $1.2175 at 2130 GMT
- Pound/dollar: DOWN at $1.3926 from $1.4011
- Euro/pound: UP at 87.18 pence from 86.89 pence
- Dollar/yen: DOWN at 106.17 yen from 106.25 yen
- West Texas Intermediate: DOWN 1.2 percent at $62.78 per barrel
- Brent North Sea crude: DOWN 1.2 percent at $66.11 per barrel
- New York - Dow: DOWN 1.8 percent at 31,402.01 (close)
- London - FTSE 100: DOWN 0.1 percent at 6,651.96 (close)