LDN - Business

European stocks gain as US yield surge pauses

[October 05, 2023] By Elizabeth Howcroft

LONDON (Reuters) - European stocks opened higher on Thursday, after a plunge in oil prices and softer U.S. labor data late on Wednesday helped bring U.S. Treasury yields back down from 16-year highs.

Asian shares rebounded from 11-month lows overnight, following gains on Wall Street. China's mainland markets remain closed for holidays.

U.S. yields have been rising in recent weeks as investors reprice the chance of the U.S. Federal Reserve keeping rates elevated for longer if inflation remains above target and the economy continues to show resilience. The 10-year U.S. yields hit a 16-year high of 4.884% overnight.

The bond sell-off paused after a cooler-than-expected U.S. private payrolls report and a 5% drop in oil prices.

At 0903 GMT on Thursday, the U.S. 10-year yield was at 4.7498%.

European government bond yields were mixed, with the benchmark 10-year German yield up 2 basis points at 2.961%. The German curve was its least inverted since March.

European stock indexes were mostly a touch higher, with the STOXX 600 up less than 0.1% on the day.

The MSCI world equity index, which tracks shares in 47 countries, was up 0.2%, rebounding from the previous session in which it hit its lowest since late March.

Traders are now looking to U.S. jobs data to give clues as to whether the bonds sell-off will continue. U.S. initial jobless claims are due later on Thursday, followed by non-farm payrolls and the unemployment rate on Friday.

"The question everyone’s asking is: can yields continue to rise further and at what point are yields going to cause some serious damage on the economy?” said Baylee Wakefield, a portfolio manager at Aviva Investors.

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The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany, October 4, 2023. REUTERS/Staff/File Photo

"If we’re going to see more positive signs from non-farm payrolls on Friday then we might get investors worrying a little bit less about seeing higher interest rates going into the end of the year."

Analysts said more evidence would be needed to see if the labor market was cooling. ING FX analysts cautioned in a client note that markets may be putting too much weight on Wednesday's private payrolls data.

"There is a risk that the breather in bonds and the dollar correction are too reliant on expectations of a jobs data miss," ING said in a client note.

In currencies, the U.S. dollar index was at 106.83, compared to a peak earlier in the week of 107.34. The euro was steady at $1.05035.

The Japanese yen also gained relief from Wednesday's market shift, changing hands at 149.

Earlier this week, analysts speculated that Japanese authorities may have intervened to support the currency, but Bank of Japan money market data showed on Wednesday that Japan most likely had not intervened.

Despite the renewed strength for the U.S. dollar, analysts still see weakness ahead, a Reuters poll showed.

Oil prices, which tanked on Wednesday, held broadly steady as the outlook for future demand remained uncertain.

Gold was a touch lower at $1,819.3.

(Reporting by Elizabeth Howcroft;Editing by Elaine Hardcastle)

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