- Stocks are falling again as fears of a major conflict in the Middle East grow. Gold hits new 3-month high, oil heads for second weekly gain
- 10-year US yields fall to 4.98%
- They had previously reached 5% for the first time since 2007
LONDON, Oct 20 (Reuters) – Red October continued to simmer in global markets on Friday with the sight of U.S. Treasury yields hitting 5% for the first time since 2007 amid an increasingly threatening conflict in the Middle East caused investors to search for security.
The traditional driver of global borrowing costs – the 10-year US Treasury yield – had fallen to 4.98% ahead of US trading, but with oil prices rising back above $93 a barrel and Israel hinting at a full-scale invasion of Gaza the mood is tense.
Europe’s stock markets (.STOXX) fell 1%. Asian stocks had fallen to an 11-month low overnight and futures markets pointed to further decline on Wall Street, which has lost 2% in the last two days.
The Bank of Japan also intervened in its bond markets as the 10-year Japanese government bond yield hit a decade high, while the scramble for safety pushed gold to a three-month high, holding up both the dollar (.DXY) and the Swiss franc well supported. /FRX
“The fact that there was little decline in bond yields in the last 48 hours, despite the S&P 500 slipping over 2% and the VIX index closing above 21 for the first time since March, is, in my opinion, very concerning.” said RBC Capital strategist Alvin said Tan, referring to one of the key fear indicators for the global market.
A plunge in Tesla shares (TSLA.O) after Elon Musk warned of demand concerns and China’s curbs on graphite exports did not improve sentiment in Europe, where shares posted a 3% loss this week and borrowing costs rose The advance was set for their steepest weekly rise since July.
The European Central Bank meets next week and is expected to leave its interest rates unchanged after ten consecutive hikes, but for now traders were just trying to get through to the end of the week.
Federal Reserve Chairman Jerome Powell said Thursday he agreed “in principle” that the recent rise in bond yields could “at least reduce the need for further rate hikes,” but also emphasized the strength of the U.S. economy.
Analysts at Bank of America noted that U.S. nominal GDP rose a “remarkable” 40% over the past three years and accelerated again to an annual growth rate of 7-8% in the third quarter.
“This market believes the Fed is ‘behind the curve’ and that the Avengers need to rein in DC’s non-stop spending enthusiasm,” the analysts said, adding that the market selloff is hurting their internal “Bull & Bear” measure of market sentiment have entered “extremely bearish” territory, which they believe is a “contrarian buy signal.”
Next week is likely to be a big test, however, with Microsoft (MSFT.O) and Alphabet (GOOGL.O) reporting their third-quarter results on Tuesday, followed by Facebook owner Meta (META.O) on Wednesday and Amazon (AMZN). O) on Thursday. These stocks, along with Apple (AAPL.O), Nvidia (NVDA.O) and Tesla, have combined to account for the bulk of the S&P 500’s 11% year-to-date rise, so any earnings disappointment could have far-reaching consequences.
Reuters graphics
Submerging markets
Troubles in the Middle East and rising global borrowing costs left emerging market stocks at an 11-month low, as did MSCI’s main Asia-Pacific index.
The Nikkei (.N225) in Tokyo ended the day down 0.5% and was down 3.2% for the week, just shy of its worst reading of the year so far.
Data from Japan showed core inflation fell below the 3% threshold in September for the first time in over a year.
China’s blue chips (.CSI300) and Hong Kong’s Hang Seng (.HSI) both fell 0.7%. to. China held interest rates steady on Friday after showing signs of a stabilizing economy this week.
In foreign exchange markets, the yen briefly rose back to 150 per dollar, although the greenback remained flat against other major world currencies after a largely quiet week by its standards. /FRX
Quincy Krosby, chief global strategist at LPL Financial, said the focus is now increasingly on the size of the U.S. budget deficit as Washington has greater need for defense financing.
US President Joe Biden on Thursday urged Americans to spend billions of dollars more to help Israel fight Hamas, as expectations grew that Israeli forces will immediately launch a ground invasion of the Gaza Strip.
A US Navy warship has intercepted three cruise missiles and several drones that may have been fired toward Israel from Yemen by the Iran-aligned Houthi movement. A US base in Iraq was also attacked, Washington said.
“There are several reasons why investors want to sell this market while very few want to buy. That’s what we saw today as risk sold off,” said Kyle Rodda, senior financial markets analyst at Capital.com.
“To put it simply, market participants do not want to take any risk until the weekend when hostilities could break out.”
Gold prices hit a new three-month high of $1,990 an ounce, the highest since late July, as investors sought safe havens amid the turmoil.
Oil prices headed for a second weekly rise on fears of an escalating regional conflict in the Middle East that would disrupt supplies.
U.S. crude rose 1% to $90.30 a barrel and Brent was at $93.50, up 1.2% on the day.
Additional reporting by Stella Qiu in Sydney; Editing by Raju Gopalakrishnan, Gareth Jones and Susan Fenton
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