Bonds rally as stocks fall

A tech-led sell-off in US stocks yesterday triggered a flight to the safety of government bonds, resulting in a fall in yields, and the Japanese yen and Swiss franc, which strengthened against the dollar and other currencies. The euro and sterling held their own against the dollar, ending the day little changed from Friday’s closing levels, though they are both about half a cent lower this morning, trading at around $1.0430 and $1.2430 respectively, after Donald Trump renewed his threat of universal tariffs, while EURGBP is a touch softer just below £0.84.

US government bonds rallied as stocks weakened with 10-year yields falling by almost 10bps to just under 4.55%, their lowest level since mid-December, while equivalent German and UK yields fell by around 5bps. In equity markets, the emergence of Chinese company DeepSeek’s AI as a low cost alternative (threat) to US-based AI saw the Nasdaq shed more than 3% and the S&P 500 almost 2%, while European stocks were also in the red for the day. Asian equities were soft overnight, though European indices have opened a touch better this morning.

The FT reports that US Treasury Secretary Bessent, whose nomination was approved by the Senate yesterday, favours a gradual phasing in of universal tariffs, starting with a rate of 2.5%. However, when asked about the report, Donald Trump said he wanted a “much bigger” rate than 2.5%, adding that he has it in his mind “what it’s going to be” but he “won’t be setting it yet”.

Business sentiment in Germany improved slightly at the start of 2025 according to latest survey from the ifo Institute, which noted that this was primarily due to a more positive assessment of the current business situation, while expectations deteriorated again. Overall, it said “companies continue to be pessimistic”.

Looking to the day ahead, the main economic releases are in the US with consumer confidence, house prices and capital goods orders scheduled for publication.