By Marc Jones
LONDON (Reuters) - It was a frantic Friday for traders as another push higher in bond-market borrowing costs and the dollar sank stocks and oil prices jumped after OPEC and its allies opted against increasing supply for the time being.
Nervy European shares started 0.7% lower, Asia had dropped, Wall Street's S&P 500 had briefly gone negative for the year on Thursday and MSCI's all-country index was on its longest losing streak in six months.
It had come after Federal Reserve Chairman Jerome Powell had shown little alarm about the rise in yields on Thursday while the lively oil markets and monthly U.S. jobs data due later meant another busy day was in store.
"Markets were a little disappointed about what Chair Powell said yesterday," said Henrietta Pacquement, head of investment- grade fixed income at Wells Fargo (NYSE:WFC) Asset Management, referring to hopes he would push back harder again rising yields.
If the U.S. data later comes in strong, it will add "fuel to the fire" she said, although central banks like the Fed and the European Central Bank, which is dealing with a more sluggish euro zone, do have the ammo to fight back if yields really started to rocket.
"Perhaps the U.S. is in the best position to take higher rates, but it will be more difficult for Europe and also EM (emerging markets)," Pacquement said.
Germany's benchmark 10-year bond yield was up 2 basis points at -0.29%, holding just below the near one-year highs hit last week as bond market pressures intensified.
Benchmark 10-year U.S. Treasury yields rose 6 bps in the half hour that Powell spoke overnight. They finished the U.S. session 8 bps higher at 1.564%, the highest closing level since mid February last year.
Real yields, which take off the rate of inflation, rose 13 bps from their intra-day lows. Yield curves resumed their steepening. The gap between two-year and 10-year U.S. yields was 8 bps wider at 142 bps, the widest since November 2015.
"The move in the (U.S.) 10 year was driven by real yields (+9.5bps) as opposed to inflation expectations (-1.3bps) which is not good for risk," Deutsche Bank (DE:DBKGn)'s Jim Reid said.
PAYROLLS
Futures for S&P 500 were down 0.5%. The tech-heavy Nasdaq Composite tumbled 2.1% on Thursday, taking it down about 10% from its record close on Feb. 12 and putting it in what is known in dealing rooms as "correction" territory.
Even though Powell made it clear that the Fed was not close to changing its ultra-loose monetary policy stance anytime soon, analysts still worry rising Treasury yields could herald higher borrowing costs, thereby limiting the fragile U.S. economic recovery.
Focus was already turning to the release of the U.S. non-farm payrolls for February, with the market eyeing a recovery in employment growth and a steady unemployment rate at 6.3%.
"We suspect the market will be inclined to look through a weaker number, with investors looking ahead to the big fiscal stimulus planned in the U.S.," said Ray Attrill, head of forex strategy at National Australia Bank.
Commodity markets were doing their bit for volatility. Oil prices added to big gains after the Organization of Petroleum Exporting Countries (OPEC) and its allies agreed to mostly maintain their supply cuts in April as they await a more solid recovery in demand from the COVID-19 pandemic. [O/R]
Brent crude futures for May rose as high as $68.25 a barrel on Friday, a level not seen since Jan. 8, 2020. The contract was up $1.53, or 2.2%, at 0930 GMT and on track for a 3% gain this the week.
"OPEC+ has kept output steady, indicating that it wants to take a cautious approach in normalising production," said Ravindra Rao, vice president, commodities at Kotak Securities.
Rising Treasury yields also bolstered demand for the dollar. The dollar index jumped to a three-month high of 91.734.
A stronger dollar hobbled the yen. By early Friday, the yen fell as low as 108.11, the lowest since June 9.
The euro was also tripped by a firmer dollar, with the common currency sluggish at $1.1955.
The dollar's strength hit gold prices, which sank to a nine-month low as investors sold the precious metal to reduce the opportunity cost of holding the non-yielding asset.
Spot gold was last at $1,697 per ounce, trading below $1,700 for the first time since June 2020.