Global equity, crude oil rose after three day plunge
Oil's spectacular fall - down almost 10 per cent since last Thursday - and world stocks' plunge to 19-month lows have prompted speculation the U.S. Federal Reserve might be done with tightening after its policy meeting later in the day.
There was also some support from China which announced an additional $14.5 billion medium-term lending facility to finance small private businesses.
Market focus is now firmly on the U.S. Federal Reserve which is widely expected to deliver a rate rise but could signal a pause next year. Futures are pricing less than one rise in 2019, down from three not long back.
While Brent crude inched up 0.5 per cent to $56.5 a barrel after plunging 6 per cent overnight, its 35 per cent fall since October is sending a disinflationary pulse through the world just as trade and economic activity are cooling.
And logistics and delivery firm FedEx, considered a bellwether for the world economy, has slashed 2019 forecasts, noting "ongoing deceleration" in global growth.
However, the global benchmark has fallen 6 per cent since the start of this month, given the fragile Sino-U.S. tariff truce and signs of slower company earnings worldwide.
Wall Street appears set for a stronger opening, with the S&P500 index futures up 0.8 per cent. But U.S. stocks are set for their worst December since 1931, the depths of the Great Depression. https://tmsnrt.rs/2A3z5ML
"It's a confluence of several important factors: the market is adjusting its outlook on growth and there is a consensus we will see a slowdown. More importantly, the market is adjusting to the idea this will translate into lower earnings growth," said Norman Villamin, chief investment officer for private banking at Union Bancaire Privee in Zurich.
"It's being complicated by the tightening liquidity situation with the Fed expected to move today and the ECB having signalled the end of its (stimulus)".
Expectations of a Fed pause and the equity sell-off have sent 10-year Treasury yields to the lowest since August at 2.799 per cent - down 20 basis points in December - through the equity recovery lifted yields off those troughs.
Yields in Japan and Australia also reached multi-month lows.
Reasons for the bond rally were easy to find. Bank of America Merrill Lynch's closely watched monthly survey found more than half of its participants now flagging a global economic slowdown next year. It also showed the third biggest decline in inflation expectations on record.
The poll also revealed the largest ever one-month rotation into fixed-income assets, their gains coming at the expense of equities.
The steep drop in Treasury yields undermined one of the U.S. dollar's major props and pulled its index back 0.3 per cent to 96.8, from a recent top of 97.711.
Villamin of UBP said that while uncertainty had grown about the Fed's rate rise path, other currencies from the yen to the euro still lacked interest rate support.
"Why the dollar won't be too weak is that the alternatives are not attractive," he said. "The only real attractive currency out there is the dollar ... we think dollar strength will stay another 3-6 months."
U.S. futures pointed to a firmer Wall Street opening.
The bright spot on world markets is Italy where bond yields continued their fall after Rome struck a deal with the EU Commission over its contentious 2019 budget, signalling an end to weeks of wrangling.
The Italian/German 10-year bond yield gap - a measure of Italian risk - narrowed to 251 bps, the tightest since late September. That spread had been over 300 bps as recently as end-November.
"Everyone was expecting an agreement to be reached, but many people were expecting this to come in Q1 or Q2 next year," said Commerzbank rates strategist Michael Leister.
"With risk sentiment stabilising this morning, it looks like the momentum can increase in Italian bonds."
(With inputs from agencies.)
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