Stock markets scratched out a new record peak in Asia on Wednesday, but their rally lost a bit of steam as a surge in U.S. Treasury yields put pressure on both lofty company valuations and hard-running commodity currencies.
Benchmark ten-year Treasury yields made a fresh one-year high to trade near pre-pandemic levels, as vaccine progress and encouraging economic data begin to drive an intense investor focus on an inflation pulse now widely expected.
The prospect of better risk-free returns stalled equities and lent support to the U.S dollar. MSCI’s broadest index of Asia-Pacific shares outside Japan eked a 0.3% gain, and a record, while Japan’s Nikkei fell 0.3%.
FTSE futures rose 0.2% while EuroSTOXX 50 futures traded just below flat and S&P 500 futures traded just above flat. Ten-year Treasury yields, up nearly 40 basis points this year, rose as far as 1.3330% before easing.
“The bond market is just focusing on what we have ahead of us,” said Masahiko Loo, a Tokyo-based portfolio manager at AllianceBernstein.
“The immediate thing is the stimulus package … and on top of that, this view that people have of inflation trending higher is encouraging them to sell bonds,” he said.
Investors, for now, do not think central banks will do anything about it anytime soon, and minutes later on Wednesday from the U.S Federal Reserve’s January meeting are expected to reinforce that view.
The gap between ten-year and two-year U.S. yields also hit its widest point in nearly three years in anticipation of short-term rates going nowhere.
“Policy rates fairly surely will be virtually zero in a couple of years time,” said Rob Carnell, chief economist in Asia at ING. “It’s just that prospect that things can be a little stronger, and instead of 1% or lower inflation it’s perhaps 2% or a little bit higher, that’s enough (to lift yields).”
Besides a cooling in stock-market exuberance, gold and the Japanese yen, have been other casualties of the rise in rates. Gold, which pays no income, tends to fall when yields rise and it touched a two-week low on Wednesday. [GOL/]
The yen is sensitive to U.S. rates because Japanese yields are anchored and higher U.S. returns can attract investment flows out of yen and into dollars. The yen hit a five-month low against the dollar on Wednesday and has lost 2.7% this year.
Gains in commodity prices have been another big driver of inflation expectations and that has caught a further boost from a Texas cold snap that has shut down about a fifth of U.S. oil production and sent energy prices sharply higher. [O/R]
Front-month gas futures also jumped as much as 10% to a more than three-month high, and although a stronger U.S. dollar has since pared gains, oil is near 13-month peaks.
U.S. crude futures rose 0.1% to $60.11 a barrel on Wednesday and Brent crude futures rose 0.2% to $63.50 a barrel.
In currency markets, the dollar’s strength was applying broad pressure. The euro dipped below its 20-day moving average to $1.2083. Sterling, which has been surging as vaccinations roll out rapidly across the United Kingdom, was forced back below $1.39 and last sat at $1.3874.
Cryptocurrency bitcoin rose, again, through $50,000 as signs of big investor interest in the asset drive more and more buying.
Ahead on Wednesday investors will be eyeing inflation data releases in Britain and Canada for any signs of a jump and U.S. retail sales data is also due.
Earnings reports this week from Hilton Worldwide Holdings Inc, Hyatt Hotels Corp and Marriott International Inc will also be scrutinized for signs of a pickup in global travel demand.