Rising US treasury yields hammer stocks

US treasury yields headed back towards 5% on Thursday, dragging shares around the world to multi-month lows in the middle of a busy week for corporate earnings, plus a central bank meeting and the release of US GDP later in the day.

A rebound in US home sales and an auction of five-year notes that showed weak demand were the latest trigger for concern in the bond market, which saw the US 10-year yield rise 11 basis points on Wednesday.

That move continued on Thursday, with the benchmark yield reaching 4.989%, challenging the 5.021% — the highest since 2007 — reached earlier in the week.

“The treasury market is clearly very much top of mind, the big back up in yields yesterday appeared to have quite a negative impact on equities as well, so how that evolves and how it reacts to data we have this week will be the big swing factor for global markets,” said Kiran Ganesh global head of investment communications at UBS Wealth Management.

US third quarter GDP is unlikely to provide help for the bond market as it is expected to show the economy grew at its fastest quarterly pace in two years, and so offer nothing to derail expectations the Fed will keep rates high for longer.

Friday’s personal consumption expenditure (PCE) price index, the Fed’s preferred inflation gauge, is also top of mind, as is Thursday’s European Central Bank meeting, where members are expected to snap a 15-month streak of hikes, but keep rates at record highs.

Earnings focus

Europe’s broad Stoxx index was down 0.8% in morning trading, just off seven-month lows hit earlier in the week, and MSCI’s broadest index of Asia-Pacific shares outside Japan hit an 11-month low.

US Nasdaq futures were down 1.2% and S&P 500 futures 0.7%, even after all three main US benchmarks had closed sharply lower on Wednesday.

Ganesh said there were three main things pushing stocks lower. “Clearly high yields are reflecting concerns that rates will have to stay high for longer, and that won’t be good for the economy in the longer term. High yields are also competing for equity market investment, and the start of the earnings season has been a mixed bag, but generally on the negative side.”

European banks were the big earnings story on Wednesday, with Standard Chartered at one point falling more than 17%, BNP Paribas fell 4% and Swedbank 7% after reporting results.

The broader European banking index fell as much as 2.4% to its lowest in four months, with Spain the only positive.

Alphabet shares logged their worst session since March 2020 overnight, dropping 9.5% as investors were disappointed with stalling growth in its cloud division.

Shares in Facebook parent Meta fell 4% on Wednesday and another 3% in after-hours trade after publishing results showing better-than-expected revenue but a cloudy outlook, with expenses seen topping Wall Street estimates.

In currency markets, the dollar index hit a two-week high of 106.7, driven by the higher yields, and the yen weakened past ¥150/$, a level that has put traders on guard for intervention to support the Japanese currency, and to a 10-month low of ¥150.78/$.

West Texas Intermediate crude dipped 0.6% to $84.89 a barrel, and Brent fell 0.4% to $89.80.

Oil rose about 2% on Wednesday on concerns about the conflict in the Middle East, but gains were capped by higher US crude inventories and gloomy economic prospects in Europe.

Spot gold rose 0.44% to about $1,988.5 an ounce, testing last week’s five-month high.

Reuters