Stocks shrug off rising yields, oil slumps on firmer dollar

[November 12, 2021]  By Huw Jones

LONDON (Reuters) - Wall Street was headed for a steady start on Friday, helping stocks to consolidate record highs in Europe on the back of strong earnings and shrug off renewed selling in U.S. Treasury markets.

The dollar was set for it biggest weekly rise in five months, helping to send crude oil prices down nearly 2% a barrel.

U.S. Treasury markets were closed on Thursday for a holiday, but selling resumed on Friday, driven by Wednesday's news of the biggest annual rise in U.S. inflation in 31 years.

Worry over interest rate hikes to quell inflation could catch up with riskier assets like stocks, analysts cautioned.

"It's all about the June Fed meeting in my mind, which is almost priced in as a hike," said Peter Chatwell, head of multi-asset strategy at Mizuho in London.

"We're at the inflection point whereby any further hawkish repricing of dollar rates markets is likely to weigh much more heavily on risk assets than it has in the past."

In Europe, euro zone money markets priced in two full European Central Bank rate hikes by the end of next year. A Reuters poll showed the Bank of England is expected to be the first major central bank to raise rates, probably next month.

U.S. stock futures were slightly firmer as shares in Johnson & Johnson rose before the bell on news it was planning to break up into two companies.

Tesla Inc Chief Executive Officer Elon Musk sold more shares of the electric carmaker, regulatory filings showed on Friday.

The world's stock prices posted their biggest fall in over a month on Wednesday on data showing the U.S. consumer price index rose 6.2% year-on-year in October, the strongest advance since November 1990.

However, European shares chalked up new highs on Friday, with the STOXX index of 600 companies up 0.08%, enough to eke out a new record high for a second day running.
 

The CAC 40 French blue chip index in Paris also clocked up a new high, helped by a rise in luxury companies following strong earnings from Cartier-owned Richemont.

The MSCI All Country stock index was up 0.1% at 752.79 points, recovering its footing after Wednesday's drop in the wake of the U.S. inflation data. The index is barely six points below Tuesday's record high.

"Directionally, the line of least resistance is for lower bond prices and higher yields and the stock market does not seem to care that much," said Mike Hewson, chief markets analyst at CMC Markets.

Bond yields ticked up on Friday, with the 10-year U.S. Treasuries yield at 1.57%.

"Inflation is obviously a risk to watch. But stock prices will face a major crash only if the Federal Reserve turns out to be completely wrong in its assessment and is forced to raise interest rates rapidly. That's not where we are now," said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities.

OIL SLUMPS

In the currency market, the dollar held firm after Wednesday's strong U.S. inflation reading fanned expectations the Fed would tighten monetary policy faster than previously thought.

An index of the dollar against six other currencies was flat at 95.160, on track for its biggest weekly rise in five months.

The yen was trading at 113.97 per dollar, down slightly on the day and near its four-year low hit last month, while commodity currencies such as the Australian dollar and the Canadian dollar were on a back foot.

Oil prices dipped as the market grappled with a stronger U.S. dollar, along with concern over increasing U.S. inflation, and after OPEC cut its 2021 oil demand forecast due to high prices.

Brent crude futures were down 1.76% at $81.40 per barrel, while U.S. West Texas Intermediate (WTI) futures dropped 1.9% to $80.02 per barrel.

Gold prices eased off Wednesday's five-month highs to $1,853 per ounce, down 0.4% on the day.

Shares in Asia were largely steady, with Japan's Nikkei up 1.13%, helped by brisk earnings. MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.62%, but mainland Chinese shares were softer, with CSI 300 index slipping 0.2%.

(Additional reporting by Hideyuki Sano and Dhara Ranasinghe; Editing by Andrei Khalip and Mark Potter)

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