Stocks fall further as U.S. yield climb unnerves investors

NEW YORK/LONDON — World stocks stumbled again on Monday while the 10-year Treasury yield hit a two-year high as bets that the U.S. Federal Reserve could raise interest rates as soon as March led investors to pare risky assets.

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

Technology stocks, which have soared in 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.

By 1523 GMT, the Dow Jones Industrial Average had shed 1.4%, the S&P 500 had lost 1.80%, and the Nasdaq Composite had slumped 2.4%.

The pan-European STOXX 600 index sagged 1.51% and MSCI’s gauge of stocks across the globe shed 1.40%.

“The big story of the first week of the new year has been the steady march higher in US treasury yields,” said Arthur Hogan, chief market strategist at National Holdings Corp. Hogan recommended investors put more money in financial, industrial and energy stocks as they will likely benefit from strong economic growth expected in the months ahead.

Goldman Sachs now expects the Federal Reserve to raise interest rates four times this year and begin the process of reducing its balance sheet size as soon as July, joining other big banks in forecasting an aggressive tightening of U.S. monetary policy.

A busy week sees U.S. inflation data due on Wednesday, which analysts say could show core inflation climbing to its highest in decades at 5.4%, a level that would all but confirm a U.S. rate rise is coming in March. The season of corporate earnings also kicks off this week with the big U.S. 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% 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% chance of a rise to 0.25% in March and at least two more hikes by year end.

FURTHER TO RUN?

Yields on 10-year U.S. Treasury notes hit a high of 1.8080% in early trading, levels last seen in January 2020, having shot up 25 basis points last week in their biggest move since late 2019. The yield later retreated to 1.7958%.

“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%, by the end of 2023.”

The dollar index edged up 0.28% to 96.06. The greenback has failed to find significant support from rising Treasury yields.

The euro stood at $1.1320, down 0.3% on the day, while the Japanese yen got a brief break from its recent bear run to trade up at 115.2.

In commodity markets, spot gold dropped 0.1% to $1,793.80 an ounce.

Oil prices dipped but held onto to recent gains, having climbed 5% last week helped in part by supply disruptions from the unrest in Kazakhstan and outages in Libya.

U.S. crude fell 0.35% to $78.62 per barrel and Brent was at $81.34, down 0.5% on the day.

The shift from risk weighed on cryptocurrencies, and Bitcoin fell 2.24% to $40,936.62.

(Additional reporting by Wayne Cole in Sydney, Editing by William Maclean and Alexander Smith)