By Josie Cox
European markets showed signs of stabilizing after several
sessions of declines Thursday, but investors remained on edge.
Having slumped to a two-month low early in the day, the Stoxx
Europe 600 recovered to trade around 0.1% lower by
midafternoon.
Individual country indexes also reduced earlier losses, and bond
markets recovered too, but investors said that the next few days
and weeks would likely remain highly volatile and that it was too
early to call an end to the rout.
"The start of the year saw some very one-way trades," said David
Vickers, a senior portfolio manager at London-based Russell
Investments, adding that this has made several asset classes
susceptible to big turnarounds.
"Markets are very interconnected at the moment and there is a
general fear lurking that this big snapback we're seeing in bond
markets will unravel equity markets too," he said. "It's a bit like
a domino effect."
European stock and bond markets rallied strongly earlier this
year, largely as a result of the European Central Bank's
quantitative-easing program, but changed direction last week and
have continued to sell off since.
Late Wednesday, U.S. Federal Reserve Chairwoman Janet Yellen
added to jitters when she suggested the yearslong stock rally may
have driven prices too high and exposed debt investors to too much
risk.
The yield on the German 10-year bond, or Bund, rose to a more
than five-month high of 0.78% early Thursday, having hit an
all-time low of 0.05% less than three weeks ago. Later in the day
it retraced to around 0.6%.
Many strategists and investors had last week dismissed the
reversal in markets as a passing blip, and were caught off guard by
the scope of this week's moves.
"This isn't just a market shakeout," said Justin Knight, head of
European rates strategy at UBS. For some weeks, Mr. Knight had been
saying that bond yields were at unsustainably low levels, but on
Thursday he said he was surprised at the speed of the reversal.
Bill Eigen, a fund manager at J.P. Morgan Funds, meanwhile, said
that this is the "most volatile market since the 2013 taper
tantrum," when the Fed indicated it could start reducing its
bond-buying program.
"Investors would be wise to focus on stability, reducing the
likelihood of capital losses and preserving capital," he said.
On Wall Street, the S&P 500 was steady in early trade.
The Chicago Board Options Exchange Volatility Index, or
VIX--commonly considered a proxy for the U.S. stock market's
capacity for sudden spikes and plunges, has risen 4% so far in
May.
In currency markets, the euro was trading 0.6% lower against the
dollar midafternoon--at just above $1.12--having hit a two-month
high early in the session.
Elsewhere, the British pound fell around 0.2% to a three-month
low against the euro as polls opened for one of the most closely
fought elections in recent U.K. history. Sterling also edged lower
against a weak U.S. dollar.
Although the pound has shown resilience in the lead-up to the
vote, strategists on Thursday said the currency would likely face
headwinds over the coming days, especially if no single party is
able to secure a majority, which could lead to lengthy negotiations
over a possible coalition.
"If heightened uncertainty weighs more heavily on the pound in
the near term, it could create an attractive opportunity to buy the
pound on dips, " said Lee Hardman, a strategist at Bank of
Tokyo-Mitsubishi UFJ.
London's FTSE 100 index was 0.6% lower by midafternoon, though
strategists said that this was also likely a symptom of the global
market moves rather than of domestic politics.
The yield on the U.K.'s 10-year gilt was recently just under 2%.
On Wednesday, it surpassed the 2% mark for the first time since
December.
--Tommy Stubbington contributed to this article
Write to Josie Cox at josie.cox@wsj.com
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