Global stocks rally as US yields hit 16-year peak

London — Global stocks extended their comeback rally on Tuesday, while benchmark treasury yields scaled 16-year highs on concerns that interest rates could stay higher for longer and the safe-haven dollar pulled back from recent 10-week highs.

The MSCI All Country stock index climbed 0.4% in a second straight session of gains — pulling further away from Friday’s 2½ month trough. Pan-European stocks gained 0.7%, while US futures pointed to small gains for Wall Street later on.

But it was US treasuries that hogged the limelight once again, with benchmark 10-year yields climbing to 4.366% — their highest level since 2007 and up almost 40 basis points (bps) month-to-date.

“There’s a more cautiously optimistic mood across financial markets,” said Fiona Cincotta, senior markets analyst at City Index in London.

However, she added the outlook for equities in particular remained challenging.

“We had an optimistic July and now there’s a realisation that what the Fed has been saying about higher rates for longer will ring true,” she added, referring to the US central bank.

The surge in yields — which move inversely to prices — comes in the wake of surprisingly upbeat US economic news that has prompted investors to trim expectations for the Federal Reserve to ease policy next year.

Those higher-for-longer-interest rate fears as well as worries about China’s faltering economy have recently sapped investor appetite hunger for stocks before the Tuesday rebound.

Treasury futures now imply less than 100bps of rate cuts by the Fed in 2024, compared to 130bps a couple of weeks ago.

At the same time, however, inflation expectations have hardly budged —meaning “real” yields, which discount inflation expectations, have surged — a development likely to prompt investors to re-evaluate taking risks.

“The bearish set-up with a waning Fed cut discount prevails, and with the 20-year treasury sale and the Jackson Hole Symposium looming large later this week, the appetite to take the other side is small,” said Padhraic Garvey, regional head of research, Americas at ING.

Markets are awaiting more hints on the outlook for interest rates from policymakers when Fed officials and policymakers from the European Central Bank (ECB), the Bank of England (BOE) and the Bank of Japan (BOJ) head to Jackson Hole, Wyoming, for their annual central bank conference later this week.

The near 300bps added to 10-year US real yields since September 2021 is the most acute tightening of real rates in 25 years, said Vishnu Varathan, head of economics at Mizuho Bank in Singapore. The 10-year real rate breached 2% late last week.

In Europe, benchmark bond yields in Germany, France and Italy eased after Monday’s sharp climb.

Japan’s 10-year government bond yield, meanwhile, hit a more than nine-year high at 0.665%, crossing a level that had prompted the BOJ to intervene in the market earlier this month.

Nvidia boost

In European stocks, the gains were driven by a 1.8% jump in the tech sector on optimism surrounding the world’s most valuable chipmaker, Nvidia, ahead of its quarterly results on Wednesday.

Tech momentum had also lifted Asian bourses, with the Hang Seng snapping a seven-day losing streak to end 1% up.

Focus was also on US banking stocks, after S&P Global late on Monday cut credit ratings and revised its outlook for multiple lenders, after a similar move by Moody’s, warning that funding risks and weaker profitability will likely test the sector’s credit strength.

The yield moves have also heaped pressure on some lower-yielding currencies with markets on watch for interventions.

The dollar index — which measures the currency against six developed-market counterparts — eased 0.18% at 103.10, below Friday’s 10-week highs at 103.68. The euro was just 0.1% firmer at $1.0908.

China’s yuan edged back down to about 7.30 per dollar, having shown signs of stabilisation after state banks had earlier used the offshore forwards market to defend it.

The yen was also on intervention watch and caught a small boost from a meeting between BOJ chief Kazuo Ueda and the Prime Minister. It was last about 0.4% higher at 145.66 per dollar.

Elsewhere, oil was steady as investors stayed sour on China’s economic prospects and demand from the world’s top crude importer, limiting the impact of supply cuts, with Brent crude futures last at $84.21.

European gas prices have been rising as strikes loom at Australian liquefied natural gas (LNG) facilities. Benchmark Dutch gas is up nearly 50% for August.

China’s benchmark Dalian iron ore price jumped 4.1% to a two-year high.

Reuters