Global stocks extend comeback, U.S. yields hit new peaks
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[August 22, 2023] By
Karin Strohecker
LONDON (Reuters) -Global stocks extended their comeback rally on
Tuesday, while benchmark Treasury yields scaled 16-year highs on
concerns that interest rates could stay higher for longer and the
safe-haven dollar pulled back from recent 10-week highs.
The MSCI All Country stock index climbed 0.4% in a second straight
session of gains - pulling further away from Friday's 2-1/2 month
trough. Pan-European stocks gained 0.7%, while U.S. futures pointed to
small gains for Wall Street later on.
But it was U.S. Treasuries that hogged the limelight once again, with
benchmark 10-year yields climbing to 4.366% - their highest level since
2007 and up almost 40 bps month-to-date. [US/]
"There's a more cautiously optimistic mood across financial markets,"
said Fiona Cincotta, senior markets analyst at City Index in London.
However, she added the outlook for equities in particular remained
challenging.
"We had an optimistic July and now there's a realization that what the
Fed has been saying about higher rates for longer will ring true," she
added, referring to the U.S. central bank.
The surge in yields - which move inversely to prices - comes in the wake
of surprisingly upbeat U.S. economic news that has prompted investors to
trim expectations for the Federal Reserve to ease policy next year.
Those higher-for-longer-interest rate fears as well as worries about
China's faltering economy have recently sapped investor appetite hunger
for stocks before the Tuesday rebound.
Treasury futures now imply less than 100 basis points (bps) of rate cuts
by the Fed in 2024, compared to 130 bps a couple of weeks ago.
At the same time, however, inflation expectations have hardly budged -
meaning "real" yields, which discount inflation expectations, have
surged - a development likely to prompt investors to re-evaluate taking
risks.
"The bearish set-up with a waning Fed cut discount prevails, and with
the 20-year Treasury sale and the Jackson Hole symposium looming large
later this week, the appetite to take the other side is small," said
Padhraic Garvey, regional head of research, Americas at ING.
Markets are awaiting more hints on the outlook for interest rates from
policy makers when Fed officials and policy makers from the European
Central Bank, the Bank of England and the Bank of Japan head to Jackson
Hole, Wyoming, for their annual central bank conference later this week.
The near 300 bps added to 10-year U.S. real yields since September 2021
is the most acute tightening of real rates in 25 years, said Vishnu
Varathan, head of economics at Mizuho Bank in Singapore. The 10-year
real rate breached 2% late last week.
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The German share price index DAX graph
is pictured at the stock exchange in Frankfurt, Germany, August 21,
2023. REUTERS/Staff/File Photo
In Europe, benchmark bond yields in Germany, France and Italy eased
after Monday's sharp climb.
Japan's 10-year government bond yield meanwhile hit a more than
nine-year high at 0.665%, crossing a level that had prompted the
Bank of Japan to intervene in the market earlier this month.
NVIDIA BOOST
In European stocks, the gains were driven by a 1.8% jump in the tech
sector on optimism surrounding the world's most valuable chipmaker
Nvidia ahead of its quarterly results on Wednesday. [.EU]
Tech momentum had also lifted Asian bourses, with the Hang Seng
snapping a seven-day losing streak to end 1% up.
Focus was also on U.S. banking stocks, after S&P Global late on
Monday cut credit ratings and revised its outlook for multiple
lenders, following a similar move by Moody's, warning that funding
risks and weaker profitability will likely test the sector's credit
strength.
The yield moves have also heaped pressure on some lower yielding
currencies with markets on watch for interventions.
The dollar index - which measures the currency against six
developed-market counterparts - eased 0.18% at 103.10, below
Friday's 10-week highs at 103.68. The euro was just 0.1% firmer at
$1.0908.
China's yuan edged back down to around 7.30 per dollar, having shown
signs of stabilisation after state banks had earlier used the
offshore forwards market to defend it.
The yen was also on intervention watch and caught a small boost from
a meeting between Bank of Japan chief Kazuo Ueda and the Prime
Minister. It was last about 0.4% higher at 145.66 per dollar.
Elsewhere, oil was steady as investors stayed sour on China's
economic prospects and demand from the world's top crude importer,
limiting the impact of supply cuts, with Brent crude futures last at
$84.21. [O/R]
European gas prices have been rising as strikes loom at Australian
liquefied natural gas facilities. Benchmark Dutch gas is up nearly
50% for August. [NG/EU]
China's benchmark Dalian iron ore price jumped 4.1% to a two-year
high. [IRONORE/]
(Reporting by Karin Strohecker; additional reporting by Dhara
Ranasinghe)
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