Global shares fell on Tuesday, crushed by a surge in U.S. 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.
U.S. 10-year Treasury yields have soared above 4.5% to their 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 (.MIWD00000PUS) down 0.34%, near its weakest in four months.
In Europe, just healthcare, consumer staples and financials managed to stay in positive territory, but those gains were offset by losses elsewhere to leave the STOXX 600 down 0.4% (.STOXX).
U.S. stock index futures , suggested a modestly weaker start on Wall Street later, down 0.1%.
The latest catalyst was two Fed officials saying on Monday monetary policy will need to stay restrictive for “some time” to bring inflation back down to the central bank’s 2% target.
“In the U.S., there seems to be some growth exceptionalism – the U.S. consumer is holding growth together and in the medium term, it favours flows into the U.S.,” Samy Chaar, chief economist at Lombard Odier in Geneva, said.
“Take those three things – relatively high oil prices, relatively high U.S. real yields, and you have a relative strong U.S. 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 right now, given the yawning gap between U.S. interest rates and those in Japan.
Monetary authorities in Japan are sticking with a policy of keeping borrowing rates extra low, 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 the 150 yen per dollar level many in the market believe is where the Bank of Japan could intervene to prop it up.
Traders are attaching a 26% chance of another U.S. 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 watching the currency market closely and stood 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 149.88 per dollar, recovering marginally from an earlier 12-month low of 149.935. 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 per dollar.
Speculation has mounted that they will step in again, given the yen is under constant pressure as benchmark 10-year U.S. yields now boast their largest premium over their Japanese counterparts since last November at nearly 400 basis points.
Last November, in turn, marked the largest gap in 20 years.
U.S. 10-year Treasuries were last up 2.5 basis points on the day at 4.708%, narrowly below the session peak at 4.710%, its highest since October 2007.
A partial agreement at the weekend that averted a U.S. government shutdown also reduced demand for Treasuries ahead of key jobs data this week.
Oil fell for a second day, with Brent crude futures , which slid by almost 5% the day before, down another 0.6% at $90.17 a barrel, while U.S. crude fell 0.4% to $88.45.
Gold meanwhile slipped 0.1% to $1,826.50 an ounce, having fallen for seven straight days, heading for its longest stretch of consecutive losses in five years.