Stocks slip as surging U.S. bond yields fuel investor angst
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[October 03, 2023] By
Amanda Cooper
LONDON (Reuters) - Global shares fell on Tuesday, crushed by a surge in
U.S. bond yields that lifted the dollar after Federal Reserve officials
served a reminder that borrowing costs won't drop any time soon.
The Fed's outlook has pummeled other rate-sensitive assets such as oil,
which slipped again on Tuesday.
U.S. 10-year Treasury yields have soared above 4.5% to their highest
since late 2007 and on Monday staged their biggest one-day rise since
early September, a move that punctured a rally in stocks, commodities
and currencies.
Global equities fell for a second day on Tuesday, leaving the MSCI
All-World index down 0.34%, near its weakest in four months.
In Europe, just healthcare, consumer staples and financials managed to
stay in positive territory, but those gains were offset by losses
elsewhere to leave the STOXX 600 down 0.4%.
U.S. stock index futures suggested a modestly weaker start on Wall
Street later, down 0.1%.
The latest catalyst was two Fed officials saying on Monday monetary
policy will need to stay restrictive for "some time" to bring inflation
back down to the central bank's 2% target.
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"In the U.S., there seems to be some growth exceptionalism - the U.S.
consumer is holding growth together and in the medium term, it favours
flows into the U.S.," Samy Chaar, chief economist at Lombard Odier in
Geneva, said.
"Take those three things - relatively high oil prices, relatively high
U.S. real yields, and you have a relative strong U.S. dollar - that is
basically drawing oxygen out of the air for financial markets and it is
creating a relatively challenging environment," he said.
The yen is a particular casualty of the dollar's march to 10-month highs
and the rise in Treasury yields right now, given the yawning gap between
U.S. interest rates and those in Japan.
Monetary authorities in Japan are sticking with a policy of keeping
borrowing rates extra low, removing an incentive for investors to own
the country's currency or its bonds.
The drop in the yen to one-year lows this week has brought it within
sight of the 150 yen per dollar level many in the market believe is
where the Bank of Japan could intervene to prop it up.
Traders are attaching a 26% chance of another U.S. rate hike in November
and a 45% chance of an increase by December, according to CME Group's
FedWatch Tool.
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A passerby walks past an electric monitor displaying various
countries' stock price index outside a bank in Tokyo, Japan, March
22, 2023. REUTERS/Issei Kato/File photo
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SENSE OF URGENCY
Japanese Finance Minister Shunichi Suzuki said on Tuesday
authorities were watching the currency market closely and stood
ready to respond, repeating a warning against speculative moves that
did not reflect economic fundamentals.
In the last week, Suzuki has said authorities are watching the yen
with either a "high" or "strong" "sense of urgency" seven times.
The yen was last at 149.88 per dollar, recovering marginally from an
earlier 12-month low of 149.935. It has lost 14% in value against
the dollar this year, marking its weakest performance since 2014.
"(It) feels like people have accepted that there is perhaps some
genuine intervention coming if they move much higher," Rob Carnell,
Asia-Pacific head of research at ING, said. "It (the dollar-yen
pair) is still nonetheless drifting upwards. Just at a very, very
glacial pace."
Last September, Japanese authorities conducted their first
intervention in 24 years, when the yen weakened past 145 per dollar.
Speculation has mounted that they will step in again, given the yen
is under constant pressure as benchmark 10-year U.S. yields now
boast their largest premium over their Japanese counterparts since
last November at nearly 400 basis points.
Last November, in turn, marked the largest gap in 20 years.
U.S. 10-year Treasuries were last up 2.5 basis points on the day at
4.708%, narrowly below the session peak at 4.710%, its highest since
October 2007.
A partial agreement at the weekend that averted a U.S. government
shutdown also reduced demand for Treasuries ahead of key jobs data
this week.
Oil fell for a second day, with Brent crude futures, which slid by
almost 5% the day before, down another 0.6% at $90.17 a barrel,
while U.S. crude fell 0.4% to $88.45.
Gold meanwhile slipped 0.1% to $1,826.50 an ounce, having fallen for
seven straight days, heading for its longest stretch of consecutive
losses in five years.
(Additional reporting by Ankur Banerjee in Singapore; Editing by
Jamie Freed, Susan Fenton and Jan Harvey)
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