Stocks routed, yields rise as US inflation threat spooks markets
LONDON (Reuters) – Stock markets were routed around the globe on Monday, with European indexes opening lower and bond yields rising as resurgent US inflation raised the possibility central banks would tighten policy more aggressively than had been expected.
Europe’s benchmark Stoxx 600 fell 1.5%, its sixth consecutive day of losses totaling 4.6% – the biggest decline since the United Kingdom voted in June 2016 to leave the European Union.
All major indexes in Europe fell: the UK’s FTSE 100 dropped 1.4%, France’s CAC 40 1.4% and Germany’s DAX 1%.
US stocks opened sharply lower on Monday as rising bond yields continued to fuel the selloff in equities and hints of inflation pickup triggered concerns that the Federal Reserve might have to raise interest rates more quickly.
The yield on 10-year US Treasury debt hit a four-year high of 2.885%, having jumped almost 7 basis points on Friday.
Rising bond yields mean higher borrowing cost for companies and an alternative investment option for traders.
Wall Street’s three major indexes logged their biggest weekly losses in two years on Friday. The S&P 500 and the Dow saw their worst weeks since early January 2016 while the Nasdaq recorded its worst week since early Feb 2016.
It was also the biggest daily point fall in the Dow since December 2008 during the financial crisis.
Friday’s US payrolls report showed wages growing at their fastest pace in more than eight years, fueling expectations that both inflation and interest rates would rise more than previously forecast.
That sparked a sell-off in US equities that was set to continue on Monday. Dow Jones futures pointed to the market opening 1.1% lower, with the S&P 500 down 0.6% and the NASDAQ down 0.9%.
Futures markets priced in the risk of three, or even more, rate rises by the Federal Reserve this year after Friday’s data release.
“This added fuel to a bond market sell-off, pushing US 10 year Treasury bond yields closer to the magic 3 percent level, which will only increase borrowing costs for corporates following years of cheap financing, thus ushering equities further from recent highs,” said Mike van Dulken, head of research at Accendo Markets
Bond yields, which move inversely to bond prices, initially rose to multi-year highs across the globe before pulling back in later trades.
Faster rate rises by the Fed would hurt emerging markets and commodity currencies, said Deutsche Bank macro strategist Alan Ruskin.
Emerging-market currency the South African rand fell 0.4 percent, with the Chinese yuan and Polish zloty down around 0.2%.
Rising US yields gave the dollar some support. Against a basket of currencies, the dollar was up fractionally at 89.267 , after climbing 0.6% on Friday for its biggest single-day gain in three months.
Any rally by the dollar weakens commodities priced in the currency, with the Thomson Reuters CRB index down 0.5%. Gold was off at $1,335.78 an ounce after losing 1% on Friday.