Global shares hit seven-month lows on Monday as the risk of a wider conflict in the Middle East and the prospect of a long stretch of high interest rates soured sentiment at the start of a week full of mega-cap earnings and key data.
Bonds were also under pressure as U.S. 10-year Treasury yields hovered around 5.0%, pushing borrowing costs up across the globe and testing equity valuations.
Washington warned over the weekend of a significant risk to U.S. interests in the Middle East as ally Israel pounded Gaza and clashes on its border with Lebanon intensified.
The European Central Bank and Bank of Canada hold policy meetings this week and, while no hikes are expected, investors will be sensitive to guidance on futures moves.
The recent surge in bond yields has tightened monetary conditions without the central banks having to do anything, allowing the Federal Reserve to signal it will likely stay on hold at its policy meeting next week.
Indeed, futures imply around a 70% chance the Fed is done tightening for this cycle and are flirting with the chance of rate cuts from May next year.
The jump in the 10-year Treasury yield towards the 5% level has challenged equity valuations and dragged most major indices lower last week, while the VIX “fear index” of U.S. stock market volatility (.VIX) hit its highest since March.
The MSCI All-World index (.MIWD00000PUS) was last down 0.1%, at its lowest since late March, when turmoil that had gripped the global banking sector started to subside. In Europe, the STOXX 600 (.STOXX) was roughly flat, around last week’s seven-month lows.
“5% from an economic perspective is just another number. But as far as investors are concerned it resonates,” Daiwa Capital chief economist Chris Scicluna said.
“I don’t think it’s a tipping point, but it’s a reminder of the record tightening we’ve had and it’s a reminder, as far as the Fed is concerned, that they can’t be entirely sure quite how much of that tightening so far has already been transmitted to the real economy and how much more is to come,” he said.
MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) slipped 0.5% to its lowest in almost a year.
The yield on the benchmark U.S. 10-year note is heading for its biggest six-monthly gain since mid-1994, with a rise of 152 basis points since late April. It was last up 5 bps at 4.969%.
U.S. index futures , were last up 0.1%.
Profits should be supported by the strength of consumer demand with figures on U.S. gross domestic product this week expected to show annualised growth of a heady 4.2% in the third quarter, and nominal annualised growth possibly as high as 7%.
“At the same time, last quarter’s modest rise in hours worked points to a strong productivity gain and surge in corporate profits,” wrote JPMorgan chief economist Bruce Kasman in a note.
“As corporate and household income share the benefits of this nominal activity surge, the underlying resilience of the U.S. private sector is being reinforced.”
This U.S. outperformance has underpinned the dollar, though the threat of Japanese intervention has capped it at around 150.00 yen at least for the moment. The dollar was last trading at 149.93 yen , just below the recent peak of 150.16.
Yields in Japan were also on the rise on speculation the Bank of Japan was discussing a further tweak to its yield curve control policy, which might be announced at its policy meeting on Oct. 31.
The euro eased 0.1% to $1.0577 , while the Swiss franc held steady at 0.8928 per dollar, having benefited from safe-haven flows over the past couple of weeks.
The ECB meets later this week and is fully expected to leave interest rates unchanged at 4%. Investors will be looking for any kind of signal from ECB President Christine Lagarde about how the recent rise in global bond yields might affect the outlook for euro zone monetary policy.
“Given the further up-shift in yields we’ve had of late, the geopolitical events since the last meeting, I think we’ll want to wait and see what her tone is and whether she’s still got a tightening bias at the margin,” Daiwa’s Scicluna said.
Gold, which hit its highest since May last week thanks also to safe-haven inflows, eased 0.3% to $1,975 an ounce.
Oil prices gave back some ground in the absence of any imminent risk of disruption to supplies from the Middle East
Brent crude fell 1% to $91.28 a barrel, while U.S. crude eased 1.2% to $87.04.