Stocks swoon as bonds slump

Jitters have begun to affect stocks following the recent bond-market slump.

The recent slump in the bond markets continued early this week, and the jitters began to affect stocks too. Germany's Dax fell by almost 2% on Tuesday, and is close to a two-month low. Pan-European and UK stocks also lost more than 1%. Meanwhile, the oil price, which hit a high for the year last week, resumed its upward trajectory after a brief correction.

What the commentators said

German bunds have been hardest hit (having been among the most expensive in the first place) and a lack of liquidity "has caused further price wobbles". As for shares, higher borrowing costs could prove a headwind for economies and equities, "especially if they're already looking expensive".

But the market gyrations aren't simply a reflection of the fundamentals. Indeed, according to economist.com's Buttonwood column, they're a reflection of technical issues traders unwinding positions, essentially. Traders always use a mixture of leverage (borrowed money), hedges and diversified positions. When many make the same bet, momentum drives prices in a certain direction, but setbacks tend to be amplified as leveraged speculators scramble to sell off holdings to cover their losses.

The fashionable trades this year have been to short sell the euro, and to be long European bonds and equities, thanks to the European Central Bank's quantitative easing (QE). "All those bets turned sour in short order."

Germany's Dax index was the main victim of the reversal in the weaker-euro trade, said James Mackintosh in the Financial Times. The snapback has also ensured that European car-makers went from being the eurozone's best-performing sector this year to the second-worst. All of this is a reminder that investors should avoid the most crowded trades "and hope the inevitable reverses do not up-end the market".

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