Global equities slump as Fed maintains hawkish stance

Global shares fell on Tuesday, crushed by a surge in US bond yields that lifted the dollar after Federal Reserve officials served a reminder that borrowing costs won’t drop any time soon.

The Fed’s outlook has pummelled other rate-sensitive assets such as oil, which slipped again on Tuesday.

US 10-year Treasury yields have soared above 4.5% to the highest since late 2007 and on Monday staged their biggest one-day rise since early September, a move that punctured a rally in stocks, commodities and currencies.

Global equities fell for a second day on Tuesday, leaving the MSCI All-World index down 0.3%, near its weakest in four months. In Europe, just healthcare, consumer staples and financials managed to stay in the green, offsetting losses elsewhere to leave the Stoxx 600 up 0.1%.

A 0.1% decline in US stock index futures suggested a modestly weaker start on Wall Street later.

The latest catalyst were comments by two Fed officials on Monday that monetary policy will need to stay restrictive for “some time” to bring inflation back down to the central bank’s 2% target.

“In the US, there seems to be some growth exceptionalism — the US consumer is holding growth together and in the medium term, it favours flows into the US,” said Samy Chaar, chief economist at Lombard Odier in Geneva.

“Take these three things — relatively high oil prices, relatively high US real yields and you have a relatively strong dollar — that is basically drawing oxygen out of the air for financial markets and it is creating a relatively challenging environment,” he said.

The yen is a particular casualty of the dollar’s march to 10-month highs and the rise in Treasury yields, given the yawning gap between US interest rates and those in Japan. Monetary authorities in Japan are sticking with a policy of keeping borrowing rates extra low, thereby removing an incentive for investors to own the country’s currency or its bonds.

The drop in the yen to one-year lows this week has brought it within sight of a level many in the market believe is where the Bank of Japan could intervene to prop it up — ¥150/$.

Traders are attaching a 26% chance of another US 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 on Tuesday authorities were keeping a close eye on the currency market and were ready to respond, repeating a warning against speculative moves that did not reflect economic fundamentals.

In the last week, Suzuki has said authorities are watching the yen with either a “high” or “strong” “sense of urgency” seven times.

The yen was last at ¥149.8/$, recovering marginally from a new 12-month low of 149.935 earlier. It has lost 14% in value against the dollar this year, marking its weakest performance since 2014.

“[It] feels like people have accepted that there is perhaps some genuine intervention coming if they move much higher,” Rob Carnell, Asia-Pacific head of research at ING, said. “It [the dollar-yen pair] is still nonetheless drifting upwards. Just at a very, very glacial pace.”

Last September, Japanese authorities conducted their first intervention in 24 years, when the yen weakened past ¥145/$. Speculation has mounted that they will step in again, given the yen is under constant pressure as benchmark 10-year US yields now boast their largest premium to their Japanese counterparts since last November, at nearly 400 basis points. Last November marked the largest gap in 20 years.

US 10-year Treasuries were last flat on the day at 4.673%, narrowly below the session peak at 4.704%, the highest since October 2007. A partial agreement at the weekend that averted a US government shutdown also reduced demand for Treasuries ahead of crucial jobs data this week.

Oil fell for a second day, with Brent crude futures down another 0.4%, having slid by almost 5% the day before, at $90.33 a barrel, while US crude fell 0.3% to $88.56.

Gold was unchanged on the day at $1,826.50 an ounce, having fallen for six straight days up to Monday’s close, its longest stretch of losses since last August.

Reuters