European stocks down, yen hits 20-year low as US hikes loom
European stocks fell on Tuesday, while 10-year US inflation-linked bond yields were on the verge of turning positive for the first time in two years, as the prospect of aggressive Fed tightening to control inflation kept investors on edge.
Investors were also bracing for the next round of corporate earnings, which will allow them to assess the impact of the Ukraine war and an increase in inflation.
This week, Heineken (HEIA), Nestle (NESN), and Renault (RNO) report from Europe. This week, Netflix (NFLX), Tesla (TSLA), and Verizon (VZ) are scheduled to report from the United States.
Yields on 10-year U.S. inflation-linked bonds (US10YTIP=RR) remained near two-year highs reached on Monday, and are on the verge of turning positive for the first time since the pandemic began.
Bond yields had been deep in negative territory when adjusted for inflation, which had reassured equity investors, but that appears to be coming to an end.
At this time, the pan-European STOXX 600 (.STOXX) was down 1.1 % , Germany’s DAX (DB1) was down 0.9 % , and the UK’s FTSE 100 (FTSE) was down 0.4 % – though analysts cautioned against over-interpreting moves due to lower liquidity over the long Easter weekend.
The MSCI world equity index (IACWI), which tracks stocks in 50 countries, fell 0.3 % . The S&P 500 futures fell 0.3 % , while the Nasdaq futures fell 0.4 % .
The Federal Reserve is almost certain to raise interest rates by 50 basis points when it meets next month, and a 75 basis point increase is not out of the question.
On Monday, St. Louis Federal Reserve President James Bullard reiterated his case for raising interest rates to 3.5 % by the end of the year, adding that a 75 basis point increase should not be discounted, though this was not his base case.
“I think that’s a good reminder for markets that that is possible, but he is known for his hawkish views, so you have to take that into account as well,” said Baylee Wakefield, multi asset portfolio manager at Aviva Investors.
Wakefield also stated that the latest developments in Ukraine, where Russia has launched a new offensive in the east, are having an effect on market volatility.
The dollar index surpassed 101 for the first time since March 2020, as the greenback reached a 20-year high against the yen and tested a two-year high against the euro, despite higher US Treasury yields.
Because of the disparity in monetary policies between Japan and the United States, the yen has fallen to its lowest level against the dollar since 2002, at 128.465.
The benchmark 10-year Treasury yield was last at 2.8877%, after earlier reaching its highest level since late 2018 at 2.909%. The 30-year U.S. Treasury yield rose above 3.0% for the first time since early 2019.
German bond yields tracked their U.S. counterparts, with the European Central Bank’s non-committal tone last week leaving German bonds exposed to the U.S. bond sell-off.
Germany’s 10-year government bond yield rose 7.9 basis points (bps) to 0.916%, its highest since July 2015.
Oil prices fell slightly but remained near their highs since mid-March, as investors worried about a global supply shortage after Libya was forced to halt some oil exports as eastern forces expanded their blockade of the sector.
Brent crude futures were down 1.9 % at $110.66 per barrel at the time of writing. Crude futures in the United States were down 0.52 % at $103.77 per barrel.
Gold prices remained stable after approaching $2,000 per ounce during Monday’s session. Spot gold was last trading at $1,978.04 per ounce.