Global stocks fall further as US yield climb unnerves investors

Stock markets fell again on Monday as US Treasury yields reached a new two-year high and investors fretted about the prospect of rising interest rates and a surge in Covid-19 infections.

Monday’s drop follows on from a bruising first week of the year when a strong signal from the Federal Reserve that it would tighten policy faster to tackle inflation, and then data showing a strong US labour market, unnerved investors who had pushed equities to record highs over the holiday period.

Technology stocks, which have soared the past two years thanks in part to very low interest rates, led the falls while investors bought into lower-valued energy and financial shares.

The drop on Monday was limited but across markets.

By 1150 GMT the Euro STOXX dropped 0.37 per cent (.STOXX), Germany’s DAX (.GDAXI) weakened 0.34 per cent while Britain’s FTSE 100 (.FTSE) slipped 0.05 per cent.

Futures on Wall Street pointed to a weaker open. The S&P 500 suffered its worst start to the year since 2016.

Asian shares bucked the trend on Monday. MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) added 0.63 per cent

A busy week sees US inflation data due on Wednesday, which analysts say could show core inflation climbing to its highest in decades at 5.4 per cent, a level that would all but confirm a US rate rise is coming in March. The season of corporate earnings also kicks off this week with the big US banks reporting from Friday onwards.

“The persistent rise in consumer inflation could further boost the Fed hawks, bring them to price a steeper normalization path, and more importantly fuel the expectation that the Fed should rapidly reduce the size of its balance sheet to avoid flattening the yield curve while fighting back inflation,” said Ipek Ozkardeskaya, an analyst at Swissquote.

Ozkardeskaya added that there was “plenty of hawkishness” yet to be priced into assets.

While the December payrolls number released last week did miss forecasts, the drop in the jobless rate to just 3.9 per cent and strength in wages suggested the economy was running short of workers.

Markets quickly shifted to reflect the risks with futures implying a greater than 70 per cent chance of a rise to 0.25 per cent in March and at least two more hikes by year end.

Further To Run?

Yields on 10-year US Treasury notes hit 1.80 per cent in early trading - levels last seen in early 2020, having shot up 25 basis points last week in their biggest move since late 2019.

“We think that the increase in long-dated Treasury yields has further to run,” said Nicholas Farr, an economist at Capital Economics.

“Markets may still be underestimating how far the federal funds rate will rise in the next few years, so our forecast is for the 10-year yield to rise by around another 50bp, to 2.25 per cent, by the end of 2023.”