Stocks stumble, bonds buckle as U.S. payrolls loom
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[July 07, 2023] By
Nell Mackenzie and Tom Westbrook
LONDON/SINGAPORE (Reuters) -World stocks slid on Friday to cap a torrid
first week of the third quarter for financial markets, with the dollar
standing tall and bonds crumbling as the resilience of U.S. jobs data
has investors bracing for interest rates heading higher still.
MSCI's broadest index of world stocks, which rose almost 6% last month
as the U.S. Federal Reserve paused its cycle of aggressive rate hikes,
dipped 0.2% on Friday while Europe's Stoxx 600 share index fell 0.3%.
Surprisingly strong partial figures on the U.S. labour market,
meanwhile, sent selling in bond markets into overdrive.
Two-year Treasury yields burst above 5% in early trading and futures
pricing started to admit the possibility that the Federal Reserve, as it
has projected, will raise rates twice before the year is out.
Ten-year Treasury yields steadied at 4.04% after rising more than 17
basis points in two sessions, but regional markets were under pressure
as selling wrapped around the globe, stopping out investors who had
positioned for a peak in rates.
"People have been very reticent to accept the idea that central banks
are going to take cash rates above 5% and 6% and hold it there," said
Andrew Lilley, chief interest rate strategist at investment bank
Barrenjoey in Sydney.
"This is a disorderly move towards reality."
Germany's two-year bond yield was down 5 bps at 3.3%, having hit a
15-year high on Thursday. In Britain, where traders are bracing both for
recession and for interest rates heading towards 6.5%, 10-year gilt
yields have hit post-2008 highs.
Although yields were lower on Friday, long-dated borrowing costs in
Europe and the United States were set to end the week more than 20 bps
higher.
"The US story differs from the UK. There, Biden's massive fiscal
spending programs may end up frustrating market sceptics this year,"
said Russ Mould, Investment Director at AJ Bell.
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The London Stock Exchange Group offices
are seen in the City of London, Britain, December 29, 2017.
REUTERS/Toby Melville/File Photo
"But the UK is doing none of the same. This is amplified by the U.S.
self-sufficiency on much of its own food, oil and energy products,"
he said.
The trend towards de-globilisation has meant "that rather than the
U.S. being a tide that lifts all boats, countries have begun to
march to their own economic tune," Mould added.
Three-year and 10-year Australian government bond yields each rose a
dozen basis points on Thursday and a dozen more on Friday to hit
decade highs.
Even well-anchored Japanese government bond yields rose on Friday.
Broader non-farm payrolls data is due at 1230 GMT on Friday and
economists polled by Reuters expect the U.S. economy added 225,000
new jobs in June versus 339,000 in May.
Private U.S. payrolls jumped 497,000 last month, the ADP National
Employment report showed on Thursday, against expectations for a
228,000 increase.
S&P 500 futures declined by 0.2% while Nasdaq futures dipped a
further 0.3%.
The buckling bond market supported the dollar, although not too much
as yields leapt globally and the fear of intervention has traders
too nervous to short the yen.
The euro was down 0.2% on the week at $1.0890. The yen fell 0.8% on
Friday, hovering at 143.00 to the dollar.
Data on Friday showed Japanese wages rising at their fastest pace in
28 years in May, although it also showed hours worked rising even
faster so hourly rates actually dropped.
In commodities, Brent crude futures rose 0.2% to $76.63 a barrel.
Gold, rose 0.2% to $1,914.66 an ounce.
(Reporting by Nell Mackenzie and Tom Westbrook; Editing by Edmund
Klamann, Kim Coghill and Andrew Heavens)
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