FOR some, yesterday's rout of the stock market could be seen coming from miles away. 'This bear move has been coming for a while,' Christopher Day, head of research at Fimat Derivatives, a subsidiary of French banking group Societe Generale, said. Goldman Sachs also forecast correctly last week that the bull market in the United States bond market was over, affecting the outlook for equity markets worldwide. When bond prices go down, bond yields go up, making fixed-income instruments look more attractive relative to stocks. Higher interest rates also tend to dampen corporate profits, further diminishing the appeal of equities. Much of the rally in Asian stocks this year was based on predictions that interest rates would continue their gradual slide as the year progressed, but the recent jump in US bond yields has led many to question that assumption. Some observers see the benchmark 30-year treasury yield rising as high as 7 per cent, after dipping below 6 per cent about the beginning of this year. When the US reported jobless figures on Friday they set off a chain reaction: 30-year US Treasury yields jumped and investors dumped US equities, pulling the Dow Jones Industrial Average 3 per cent lower. The sell-off continued when Asia opened yesterday, sweeping through Europe and back into North America. The jobless figures that sparked this fire were not that earth-shattering, most market players said. But bond and equity markets were poised to shift; technical indicators showed the US long-bond yield ready to jump (see accompanying graph) and many analysts have been waiting months for a healthy correction to the breath-taking rally in US stocks. Bond yields are particularly sensitive to indicators that might influence interest rate policy of the US Federal Reserve. When the Fed meets again on March 26, policy makers will be confronted with a confusing array of economic data. US stock traders interpreted Friday's figures - the creation of 705,000 jobs in February - as particularly telling, showing clearer-than-average signs that the US economy still has some life in it. A bubbling economy does not bode well for interest rate cuts. Hong Kong shares trading in London took a beating on Friday evening, but even that did not prepare most traders for the meltdown in Asia yesterday. After having the weekend to think about it, many investors in Asian equities decided the picture looked bleak enough to pull out. China raised the stakes with its exercises off Taiwan, adding an element of 'unquantifiable uncertainty', in the words of Jake VanderKamp, strategist for HG Asia in Hong Kong. Everyone suspected markets in Asia would open lower yesterday, but the magnitude of the drop in Hong Kong caught brokers and investors alike by surprise.
