Rising bond yields stoke fears of global stock market retreat

Kenny Grant
October 9, 2018

The Dow Jones Industrial Average fell 180.43 points, or 0.68 percent, to 26,447.05, the S&P 500 lost 16.04 points, or 0.55 percent, to 2,885.57. The Russell 2000 index of small-cap stocks also slipped 10 points to 1,661, in line with the broader market.

Brent crude futures fell 64 cents to $85.65 a barrel, a 0.7 percent loss, by 11:44 a.m. EDT (1544 GMT), having risen to a late 2014 high of $86.74 on Wednesday. While that was its biggest loss since late June, it could have been worse: stocks were down nearly twice that much before a late rally. The September total was probably reduced by the damage Hurricane Florence did to the Carolinas.

Fed fund futures for December 2019 sank to a contract low of 97.12, implying a rate of 2.88 percent.

With yields rising all around, Italian borrowing costs dropped on Thursday, adding to the previous day's sharp declines, after Italy said it would cut budget deficit targets from 2020 and reduce its debt over the next three years.

The central bank has long stated that it's closely watching inflation and the pace of U.S. growth, and new signals of economic strength are commonly seen as emboldening them as they tighten monetary conditions.

"A Federal Reserve that is raising rates to prevent the U.S. economy from overheating is constraining the policy options of countries where financial conditions are tightening and trade tensions intensifying".

BONDS: Bond prices kept falling. A dramatic surge in Treasury yields this week that may attract investors seeking higher returns is also seen as positive for the USA currency.

The "transatlantic spread" between United States and German 10-year bond yields hit a three decade high of around 275 bps.

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The drop in prices and increase in yields have led to big gains for banks in the last few days because higher interest rates mean they make bigger profits on mortgages and other loans.

Italian bond yields had initially bucked this trend and fallen after the government moderated contentious spending plans, but this changed as the session wore on as a report suggested the European Union was poised to reject Rome's budget plans. Lincoln National gained 5 percent to $70.85 and General Electric jumped 4 percent to $13.16. Software platform Telaria Inc (NYSE:TLRA) was a top decliner after reporting lower-than-expected preliminary third-quarter results and slashing its full-year guidance.

Technology and internet companies and smaller, more US -focused companies continued to suffer steep losses. Intel lost 1.1 percent to $47.63 and Netflix lost 2.78 percent to $353.62.

USA crude CLcv1 oil futures settled at $74.33 a barrel, down 2.72 percent.

Higher US yields are anything but favourable for emerging markets as they tend to draw away much-needed foreign funds while pressuring local currencies. It was on track for a weekly gain of about 2 percent. PC maker Lenovo Group Ltd. plunged 15 percent in Hong Kong, amid Bloomberg's report that China infiltrated USA companies by hacking hardware.

Brent crude futures gained 0.5 per cent to $85.03 barrel, and U.S. crude rose 0.7 per cent to $74.88 barrel.

The dollar shot to its highest so far this year on the yen at 114.55 before steadying at 114.40.

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