LONDON, Oct 3 (Reuters) – Global stocks fell on Tuesday, hit by a rise in U.S. bond yields that boosted the dollar after Federal Reserve officials reminded that borrowing costs will not fall any time soon.
The Fed’s outlook has hurt other interest rate-sensitive assets such as oil, which fell again on Tuesday.
U.S. 10-year Treasury yields rose above 4.5% to their highest level since late 2007 and posted their biggest one-day rise since early September on Monday, a move that thwarted a rally in stocks, commodities and currencies.
Global stocks fell for a second time on Tuesday, with the MSCI All-World Index (.MIWD00000PUS) falling 0.34%, close to its weakest level in four months.
In Europe, only healthcare, consumer staples and financials managed to stay in positive territory, but those gains were offset by losses elsewhere, sending the STOXX 600 down 0.4% (.STOXX).
U.S. stock index futures pointed to a slightly weaker start on Wall Street, down 0.1%.
The latest trigger was two Fed officials saying Monday that monetary policy would need to remain tight “for some time” to bring inflation back down to the central bank’s 2 percent target.
“There seems to be some growth exceptionalism in the U.S. – the U.S. consumer is holding growth together and driving inflows to the U.S. in the medium term,” said Samy Chaar, chief economist at Lombard Odier in Geneva.
“Take those three things — relatively high oil prices, relatively high U.S. real yields and you have a relatively strong U.S. dollar — that basically deprives financial markets of oxygen and creates a relatively challenging environment,” he said.
The yen is a particular victim of the dollar’s rise to 10-month highs and the recent rise in Treasury yields, given the yawning gap between interest rates in the U.S. and those in Japan.
Monetary authorities in Japan are sticking to their policy of keeping lending rates particularly low, thereby removing the incentive for investors to own the country’s currency or bonds.
The yen’s fall to a one-year low this week has put it within sight of the 150 yen per dollar level, where many in the market believe the Bank of Japan could intervene to support it.
According to CME Group’s FedWatch tool, traders estimate a 26% chance of another U.S. rate hike in November and a 45% chance of a hike by December.
SENSE OF URGENTITY
Japanese Finance Minister Shunichi Suzuki said on Tuesday that authorities are closely monitoring the foreign exchange market and are ready to respond, repeating his warning against speculative moves that do not reflect economic fundamentals.
In the last week, Suzuki said seven times that authorities were watching the yen with either a “high” or “strong” “sense of urgency.”
The yen was last at 149.88 per dollar, recovering slightly from its previous 12-month low of 149.935. It has lost 14% against the dollar this year, marking its weakest performance since 2014.
“(It) feels like people have accepted that there might be a real intervention if they go much higher,” said Rob Carnell, Asia-Pacific research director at ING. “It (the dollar-yen pair) is still drifting higher. Just at a very, very glacial pace.”
Last September, Japanese authorities carried out their first intervention in 24 years as the yen weakened above 145 per dollar.
Speculation that they will intervene again is growing as the yen remains under constant pressure with benchmark 10-year U.S. Treasury yields now at nearly 400 basis points, their widest spread to their Japanese counterparts since last November.
Last November marked the largest gap in 20 years.
The 10-year U.S. Treasury note was last up 2.5 basis points on the day at 4.708%, just below the session high of 4.710%, the highest since October 2007.
A partial agreement over the weekend that averted a U.S. government shutdown also reduced demand for Treasury bonds ahead of key jobs data this week.
Oil prices fell for a second day, with Brent crude futures, down nearly 5% the day before, falling another 0.6% to $90.17 a barrel, while U.S. crude fell 0.4% fell to $88.45.
Meanwhile, gold prices slipped 0.1% to $1,826.50 an ounce, after falling for seven straight days, heading for their longest stretch of continuous losses in five years.
Additional reporting by Ankur Banerjee in Singapore; Editing by Jamie Freed, Susan Fenton and Jan Harvey
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