Red October rumbles on as U.S. bond yields touch 5%
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[October 20, 2023] By
Marc Jones
LONDON (Reuters) - Red October rumbled on in world markets on Friday as
the sight of U.S. government bonds yields hitting 5% for the first time
since 2007 amid an increasingly threatening conflict in the Middle East
left investors searching for safety.
The traditional driver of world borrowing costs - the 10-year U.S.
Treasury yield - had retreated to 4.94% ahead of U.S. trading but with
oil bounding back above $93 a barrel and Israel hinting at a full-scale
invasion of Gaza, the mood was fraught.
Europe's share markets [.EU] dropped 1%. Asia stocks had fallen to an
11-month low overnight and futures markets pointed to another slip on
Wall Street, which has lost 2% over the last two days. [.N]
The Bank of Japan had intervened in its bond markets too as the 10-year
JGB yield touched a decade high, while the scramble for safety pushed
gold to a 3-month top and kept both the dollar and Swiss franc well
supported. [GOL/][/FRX]
"The fact that there was little pullback in bond yields in the past 48
hours despite the S&P 500 slipping over 2% and the VIX Index closing at
over 21 for the first time since March is very disconcerting in my
view," RBC Capital strategist Alvin Tan said, referring to one of main
global market fear gauges.
A slump in Tesla shares after Elon Musk warned of demand worries and
China curbing graphite exports wasn't helping the mood either in Europe,
where shares were facing a 3% loss for the week [.EU] and borrowing
costs were heading for their steepest weekly rise since July. [GVD/EUR]
The European Central Bank meets next week and is expected to keep its
rates on hold after 10 consecutive increases but for now traders were
just trying to make it to the end of the week.
Federal Reserve chief Jerome Powell had said on Thursday that he agreed
"in principle" that the recent jump in bond yields might "at the margin"
lessen the need for more rate hikes, but also stressed the strength of
the U.S. economy.
Bank of America analysts pointed out that U.S. nominal GDP has risen by
a "remarkable" 40% in the past three years, reaccelerating again in Q3
to a 7-8% annualized growth rate.
There is no U.S. recession at present because there is no job or wealth
insecurity, they added. "This market believes Fed "behind-the-curve" and
avengers needed to curb DC’s non-stop enthusiasm for spending," the
analysts said.
They also said the selloff in stocks and other traditionally riskier
assets had dragged their in-house "Bull & Bear" gauge of market
sentiment into "extreme bearish" territory, which they said was a
"contrarian buy signal".
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A monitor displays stock market information on the trading floor at
the New York Stock Exchange (NYSE) in Manhattan, New York City,
U.S., May 18, 2022. REUTERS/Andrew Kelly/File Photo
SUBMERGING MARKETS
The Middle East troubles and rising global borrowing costs meant
emerging market stocks were at an 11-month low as was MSCI's main
Asia Pacific index.
Tokyo's Nikkei finished 0.5% lower on the day and -3.2% for the
week, which was only just short of being its worst of the year so
far.
Data out of Japan showed that core inflation in September slowed
below the 3% threshold for the first time in over a year.
China's blue chips and Hong Kong's Hang Seng both dropped 0.7%. too.
China on Friday held its benchmark lending rates steady following
some signs of stabilization in the economy this week.
In the currency markets, the yen briefly revisited 150 to the dollar
again although the greenback was flat against other major world
currencies after a largely quiet week by its standards. [/FRX]
Quincy Krosby, chief global strategist at LPL Financial, said the
focus was now intensifying on the scale of the U.S. fiscal deficit
because of Washington's larger defense funding needs.
U.S. President Joe Biden asked Americans on Thursday to spend
billions more dollars to help Israel fight Hamas, amid mounting
expectations that Israeli forces will imminently mount a ground
invasion of Gaza.
A U.S. Navy warship intercepted three cruise missiles and several
drones launched by the Iran-aligned Houthi movement from Yemen
potentially toward Israel. A U.S. base in Iraq also came under
attack, Washington said.
"There are several reasons why investors would want to sell this
market, while very few to buy. That's what we've seen today as risk
sells off," said Kyle Rodda, senior financial market analyst at
capital.com.
"To put it in simplest terms, market participants don't want to be
carrying risk into the weekend when hostilities could erupt."
Gold prices scaled a fresh 3-month peak of $1,990 per ounce, the
highest since late July, as investors sought safe-haven assets in
the turmoil. [GOL/]
Oil prices were headed for the second weekly gain, due to fears of
an escalating regional conflict in the Middle East, which would
disrupt supplies.
U.S. crude jumped 1% to $90.30 per barrel and Brent was at $93.50,
up 1.2% on the day. [O/R]
(Additional reporting by Stella Qiu in Sydney; Editing by Raju
Gopalakrishnan and Gareth Jones)
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