World stocks slid on Friday to cap a torrid first week of the third quarter for financial markets, with the dollar standing tall and bonds crumbling as the resilience of U.S. jobs data has investors bracing for interest rates heading higher still.
MSCI’s broadest index of world stocks, which rose almost 6% last month as the U.S. Federal Reserve paused its cycle of aggressive rate hikes, dipped 0.2% on Friday while Europe’s Stoxx 600 share index fell 0.3%.
Surprisingly strong partial figures on the U.S. labour market, meanwhile, sent selling in bond markets into overdrive.
Two-year Treasury yields burst above 5% in early trading and futures pricing started to admit the possibility that the Federal Reserve, as it has projected, will raise rates twice before the year is out.
Ten-year Treasury yields steadied at 4.04% after rising more than 17 basis points in two sessions, but regional markets were under pressure as selling wrapped around the globe, stopping out investors who had positioned for a peak in rates.
“People have been very reticent to accept the idea that central banks are going to take cash rates above 5% and 6% and hold it there,” said Andrew Lilley, chief interest rate strategist at investment bank Barrenjoey in Sydney.
“This is a disorderly move towards reality.”
Germany’s two-year bond yield was down 5 bps at 3.3%, having hit a 15-year high on Thursday. In Britain, where traders are bracing both for recession and for interest rates heading towards 6.5%, 10-year gilt yields have hit post-2008 highs.
Although yields were lower on Friday, long-dated borrowing costs in Europe and the United States were set to end the week more than 20 bps higher.
“The US story differs from the UK. There, Biden’s massive fiscal spending programs may end up frustrating market sceptics this year,” said Russ Mould, Investment Director at AJ Bell.
“But the UK is doing none of the same. This is amplified by the U.S. self-sufficiency on much of its own food, oil and energy products,” he said.
The trend towards de-globilisation has meant “that rather than the U.S. being a tide that lifts all boats, countries have begun to march to their own economic tune,” Mould added.
Three-year and 10-year Australian government bond yields each rose a dozen basis points on Thursday and a dozen more on Friday to hit decade highs.
Even well-anchored Japanese government bond yields rose on Friday.
Broader non-farm payrolls data is due at 1230 GMT on Friday and economists polled by Reuters expect the U.S. economy added 225,000 new jobs in June versus 339,000 in May.
Private U.S. payrolls jumped 497,000 last month, the ADP National Employment report showed on Thursday, against expectations for a 228,000 increase.
S&P 500 futures declined by 0.2% while Nasdaq futures dipped a further 0.3%.
The buckling bond market supported the dollar, although not too much as yields leapt globally and the fear of intervention has traders too nervous to short the yen.
The euro was down 0.2% on the week at $1.0890. The yen fell 0.8% on Friday, hovering at 143.00 to the dollar.
Data on Friday showed Japanese wages rising at their fastest pace in 28 years in May, although it also showed hours worked rising even faster so hourly rates actually dropped.
In commodities, Brent crude futures rose 0.2% to $76.63 a barrel. Gold , rose 0.2% to $1,914.66 an ounce.
