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Stocks routed, yields rise as U.S. inflation threat spooks markets

Published 2018-02-05, 07:53 a/m
© Reuters.  Stocks routed, yields rise as U.S. inflation threat spooks markets
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* Higher U.S. wage inflation sparks global sell-off

* European stocks on worst run since Brexit vote

* 10-year Treasury yields hit four-year high

* Emerging market and commodity currencies slide

* Graphic: World FX rates in 2017 http://tmsnrt.rs/2egbfVh

By Alasdair Pal

LONDON, Feb 5 (Reuters) - Stock markets were routed around the globe on Monday, with European indexes opening lower and bond yields rising as resurgent U.S. inflation raised the possibility central banks would tighten policy more aggressively than had been expected.

Europe's benchmark Stoxx 600 .STOXX fell 1.5 percent, its sixth consecutive day of losses totalling 4.6 percent - the biggest decline since the United Kingdom voted in June 2016 to leave the European Union.

All major indexes in Europe fell: the UK's FTSE 100 .FTSE dropped 1.4 percent, France's CAC 40 .FCHI 1.4 percent and Germany's DAX .GDAXI 1 percent.

Friday's U.S. payrolls report showed wages growing at their fastest pace in more than eight years, fuelling expectations that both inflation and interest rates would rise more than previously forecast .

That sparked a sell-off in U.S. equities that is set to continue on Monday. Dow Jones futures 1YMc1 pointed to the market opening 1.1 percent lower, with the S&P 500 EScv1 down 0.6 percent and the NASDAQ NQc1 down 0.9 percent.

Futures markets 0#FF: priced in the risk of three, or even more, rate rises by the Federal Reserve this year after Friday's data release.

"This added fuel to a bond market sell-off, pushing US 10 year Treasury bond yields closer to the magic 3 percent level, which will only increase borrowing costs for corporates following years of cheap financing, thus ushering equities further from recent highs," said Mike van Dulken, head of research at Accendo Markets

Bond yields, which move inversely to bond prices, initially rose to multi-year highs across the globe before pulling back in later trades.

Yields on 10-year U.S. Treasury debt US10YT=RR hit a four-year high of 2.885 percent, having jumped almost 7 basis points on Friday. They were last trading at 2.833 percent.

German 10-year yields, the benchmark in Europe, rose to 0.774 percent DE10YT=RR , their highest since September 2015, before falling to last trade at 0.671 percent.

FX FALLOUT

Faster rate rises by the Fed would hurt emerging markets and commodity currencies, said Deutsche Bank (DE:DBKGn) macro strategist Alan Ruskin.

Emerging-market currency the South African rand ZAR= fell 0.4 percent, with the Chinese yuan and Polish zloty PLN= down around 0.2 percent.

Rising U.S. yields gave the dollar some support. Against a basket of currencies, the dollar was up fractionally at 89.267 .DXY , after climbing 0.6 percent on Friday for its biggest single-day gain in three months.

Any rally by the dollar weakens commodities priced in the currency, with the Thomson Reuters CRB index .TRCCRB down 0.5 percent. Gold XAU= was off at $1,335.78 an ounce after losing 1 percent on Friday.

In oil markets, Brent LCOc1 fell 1.36 percent to $67.66 a barrel and U.S. crude CLc1 dropped 1.06 percent to $64.76.

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