Rising Treasury yields rattle stocks, underpin dollar

Reuters | | Updated on: Apr 23, 2018

Oil prices just off peaks, lift inflation expectations

Asian stocks dipped on Monday as investors braced for a bevy of earnings from the world's largest corporations, while keeping a wary eye on US bond yields as they approach peaks that have triggered market spasms in the past.

Traders were also anxiously awaiting surveys on global manufacturing for April to see if economic softness in the first quarter was just a passing phase linked to poor weather and the Lunar New Year holidays.

The first reading from Japan was tentatively upbeat with its PMI firming to 53.3 in April as output and domestic demand picked up.

On the geopolitical front, US President Donald Trump had said on Sunday the North Korean nuclear crisis was a long way from being resolved, striking a cautious note a day after the North pledged to end its nuclear tests.

Oil prices edged down in early trade but were not far from their highest since late 2014. The market had wobbled on Friday when Trump tweeted criticism of OPEC's role in pushing up global prices, but quickly steadied. Brent crude oil futures were off 9 cents at $73.97 per barrel, while US crude eased 19 cents to $68.21.

In stock markets, MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.4 per cent, with South Korea off 0.3 per cent. Japan's Nikkei also eased 0.3 per cent as tech stocks continued to struggle with a warning on waning demand for mobile phones. E-Mini futures for the S&P 500 went the other way, edging up 0.1 per cent.

Rising bond yields had pressured Wall Street on Friday, though the S&P 500 still managed to end the week with a slight gain. More than 180 companies in the S&P 500 are due to report results this week including Amazon, Alphabet, Facebook, Microsoft, Boeing and Chevron.

The 3 per cent barrier

The spike in oil has driven up both market expectations of future inflation and long-term bond yields. Yields on 10-year Treasuries finished last week at the highest since early 2014 and at 2.966 per cent were again challenging the hugely important 3 per cent barrier.

The last time yields neared this number in 2013 it rocked risk appetite and sent stocks sliding. “Another $5/barrel increase in oil will be enough for US 10-year yields to threaten 3 per cent. Oil is now at the cusp of levels where higher prices will spark greater FX and broader asset market volatility,” said Deutsche Bank's macro strategist, Alan Ruskin.

Traditionally the dollar had a slight negative correlation with oil, mostly because the dominant causation goes from dollar weakness to rising oil prices, he added.

“If oil helps push the 10 year yield into new terrain for this cycle, this will play at least mildly USD positive in a change of correlation.”

Indeed, dealers cited widening yield differentials for the dollar's broad rally on Friday. The currency was last at 107.77 yen and testing major resistance in the 107.90/108.00 zone which has held solid since mid-February.

The dollar index edged up to 90.369, and further away from last week's low at 89.229. The euro was easier at $1.2276, having repeatedly failed to break above $1.2400 in the last couple of weeks.

ECB policy meet

Investors are awaiting the European Central Bank's policy meeting on Thursday amid talk policy makers feel it is still too early to announce a timetable for winding down its bond buying.

ECB chief Mario Draghi had on Friday said he was confident that the inflation outlook has picked up, but uncertainties “warrant patience, persistence and prudence.”

Published on April 23, 2018
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