Stocks stumble as US bond yields hit highest since 2014

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

The yield on 10-year US Treasuries hit its highest level since January 2014 at 2.9790 perc ent in early European trade, as the spread over the German equivalent briefly touched its widest level in 29 years.

Traders were also getting a global round of economic surveys that should show if economic softness in the first quarter was just a passing phase linked to wintery weather and the Lunar New Year holidays.

Readings from Japan, France and Germany were all relatively reassuring. Japan's PMI firmed as output and domestic demand picked up, France was helped by its services sector, while Germany was also above forecast despite weaker new orders numbers.

“It's a good reading, it's still encouraging,” said Chris Williamson, chief business economist at IHS Markit, of the combined euro zone numbers, which he said pointed to quarterly GDP growth of 0.6 per cent.

Geopolitical risks

On the geopolitical front, there was plenty to digest too. Signs that US-China relations may be thawing were offset somewhat as President Donald Trump cautioned the North Korean nuclear crisis was a long way from being resolved, 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 20 cents at $73.83 per barrel, while US crude eased to $68.16.

In stock markets, MSCI's world index fell 0.2 per cent after Asia shed 0.5 per cent overnight and Europe then slipped 0.3 per cent as results from Switzerland's biggest bank, UBS, disappointed and the rise in yields put pressure on bond-proxy sectors.

E-Mini futures for the S&P 500 were also pointing to lower start for Wall Street later. 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

Of particular concern for US analysts will be executives' views about their exposure to China, the world's No. 2 economy and an important market for many US companies amid the recent worries about a trade war.

US Treasury Secretary Steven Mnuchin said on Saturday he may travel to China, a move that could ease tensions between the two supersized economies.

“A trip is under consideration,” Mnuchin said at a news conference during the International Monetary Fund and World Bank spring meetings in Washington.

“I did meet with the Chinese here. The discussions were really more around the governor's actions at the PBOC (People's Bank of China) and certain actions they've announced in terms of opening some of their markets, which we very much encourage and appreciate.”

Crude oil

Back in commodity markets, the spike in oil has driven up both market expectations of future inflation and long-term bond yields. Yields on 10-year Treasuries are at the highest now since early 2014 at 2.977 per cent and again threatening the hugely important 3 per cent bulwark.

The last time yields neared this number in 2013 it rocked risk appetite and sent stocks sliding. It also came shortly before oil prices went on a mighty 75 per cent tumble.

“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 107.89 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 90.528, and further away from last week's low at 89.229.

ECB policy meet

The euro was easier at $1.2251, having repeatedly failed to break above $1.2400 in the last couple of weeks. Investors are awaiting the European Central Bank's policy meeting on Thursday amid talk policymakers 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.”

COMMENT NOW