LONDON (Reuters) – Global stocks fell on Tuesday, weighed down by a rise in US bond yields that lifted the dollar after Federal Reserve officials warned that borrowing costs will not fall anytime soon.
The Fed’s forecast hurt other interest rate-sensitive assets such as oil, which fell again on Tuesday.
US 10-year Treasury yields rose above 4.5% to their highest levels since late 2007 and on Monday saw their biggest single-day rise since early September, a move that stunted a rally in stocks, commodities and currencies.
Global stocks fell for a second day on Tuesday, leaving the MSCI World Index (.MIWD00000PUS) down 0.3%, near its weakest levels in four months. In Europe, only healthcare, consumer staples and financials managed to stay in the green, offsetting losses elsewhere to leave the STOXX 600 up 0.1% (.STOXX).
US stock index futures signaled a slightly weaker start on Wall Street later, down 0.1%.
The latest catalyst was two Fed officials saying on Monday that monetary policy must remain tight “for some time” to bring inflation back to the central bank’s 2% target.
“In the US, there seems to be some exceptional growth – the US consumer is holding growth together and in the medium term, they are favoring flows into the US,” said Sami Char, chief economist at Lombard Odier in Geneva.
“Take these three things — relatively high oil prices, relatively high real yields in the U.S., and you have a relatively strong U.S. dollar — that take the oxygen out of the air for financial markets and create a relatively challenging environment,” he said.
The yen was a particular victim of the dollar’s rise to a ten-month high and Treasury yields rising at the moment, given the widening gap between US interest rates and those in Japan. Japan’s monetary authorities are committed to a policy of keeping borrowing rates very low – thus removing the incentive for investors to own the country’s currency or bonds.
The yen’s fall to a one-year low this week put it within sight of a level many in the market believe the Bank of Japan could step in to support – 150 yen to the dollar.
Traders are pinning a 26% chance of another US interest rate hike in November and a 45% chance of an increase by December, according to CME Group’s FedWatch tool.
sense of urgency
Japanese Finance Minister Shunichi Suzuki said Tuesday that authorities are closely monitoring the currency market and are preparing to respond, reiterating a warning against speculative moves that do not reflect economic fundamentals.
Last week, Suzuki said authorities were monitoring the yen with either a “high” or “strong” “sense of urgency” seven times.
In the latest transactions, the yen recorded 149.8 yen to the dollar, recovering slightly from a new 12-month low of 149.935 earlier. The currency lost 14% of its value against the dollar this year, which represents its weakest performance since 2014.
“People seem to have accepted that there might be some real intervention if they move much higher,” said Rob Carnell, head of Asia-Pacific research at ING. “USD/JPY is still drifting higher. But at a very slow pace.”
Last September, the Japanese authorities carried out their first intervention in 24 years, when the value of the yen fell to more than 145 yen against the dollar. Speculation has been growing that they will intervene again, given that the yen is under continued pressure as benchmark US 10-year bond yields boast the largest premium to their Japanese counterparts since last November, at nearly 400 basis points. Last November also saw the largest gap in 20 years.
US 10-year Treasury notes were flat on the day at 4.673%, just below the session peak of 4.704%, the highest level since October 2007. The partial agreement over the weekend that averted a US government shutdown also dampened demand for… Treasuries before major elections. Jobs data this week.
Oil fell for a second day, with Brent crude futures down another 0.4%, after falling nearly 5% the day before, at $90.33 a barrel, while US crude fell 0.3% to $88.56.
Meanwhile, gold was unchanged on the day at $1,826.50 an ounce, having fallen for six straight days until Monday’s close, its longest losing streak since last August.
Additional reporting by Ankur Banerjee in Singapore. Edited by Jamie Freed and Susan Fenton
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