Faltering risk appetite hits stocks, sends Bund yields to record lows

LONDON: Global stocks retreated on Thursday, dragged down by lower European and Japanese equity markets, as appetite for riskier assets faltered, underpinning demand for safe-haven German Bunds whose yields hit record lows.

The dollar hit a five-week low against the yen, hurt by falling Treasury yields amid waning expectations that the Federal Reserve will lift interest rates anytime soon. Those expectations saw German 10-year Bund yields hit a low of 0.034 percent, not far from negative territory in which $10 trillions worth of bonds globally already trade at.

Investors have almost priced out the chance of a rate increase at the Fed Reserve's June 14-15 policy review, and reduced the likelihood of a July rate hike to around 26 percent.

With worries about a possible British exit from the European Union also gathering, investors are uncertain whether the Fed will raise rates in the near term.

European shares fell for a second straight day, with a drop in Vodafone weighing on the telecom sector and Essentra hit by a profit warning. Earlier, Japan's Nikkei fell 1 percent, hurt by a stronger yen with financials and banking stocks leading the losses on falling bond yields.

All of which saw the MSCI world equity index , fall 0.4 percent to 1,691.84. It had scaled a six-month high on Wednesday, when Wall Street's benchmark S&P 500 was just shy of all time closing highs, bolstered in part by the Fed's stance and a recent weakness in the dollar.

"The weaker dollar is overall bad for European companies and ... the Brexit vote means there will be a lot of uncertainties in the mid term," Jerome Schupp, head of research at SYZ Asset Management in Geneva.

In the currency market, apart from the dollar being the talking point, the New Zealand dollar was in the limelight, soaring to a one-year high after the nation's central bank kept rates steady as expected, even as some in the market had wagered on a cut.

On the other hand, the Bank of Korea unexpectedly cut its policy rate to a record low 1.25 percent amid weak inflation and stagnant exports. The BOK may also be looking to cushion the economy as the government drives a major overhaul of the struggling shipping and shipbuilding industries that could see large job losses.

OIL FALLS

The euro retreated from one-month peak of $1.1416, hurt partly by falling German Bund yields and amid uncertainty stemming from Britain's June 23 referendum on whether to leave the European Union.

In commodities, U.S. crude oil fell 0.3 percent to $51.08 a barrel after hitting a 11-month high of $51.67 a barrel. Brent crude rose as high as $52.86 a barrel, highest since October 2015, but was last trading lower at $52.23 a barrel.

Spot gold dropped after hitting a three-week high of $1,266.01 an ounce, while aluminium fell 1 percent after climbing to a one-month high of $1,614.50 a tonne. Copper also fell.

"I think gold is going to stay range bound until we see more confirmation. We need more confirmation from labour market data in the U.S. that we get in a month from now. The market wants to see at least two data points," said Dominic Schnider of UBS Wealth Management in Hong Kong.