Stocks Slide as Rising Borrowing Costs Strike Again

LONDON—World stocks fell for a third straight day on Thursday, after Federal Reserve meeting minutes bolstered bets on another U.S. rate hike this month and tit-for-tat trade salvos between China and the United States also dampened sentiment.

Traders watched the traditional driver of global borrowing costs, the 10-year U.S. Treasury yield, climb to a fresh four-month high and there were plenty more boundaries tested as Europe got into its stride.

A broad-based stocks fall included a 2.3 percent drop and two-month low for the region’s travel and leisure stocks—a clear side-effect of recession angst—while Wall Street bank Citi’s latest investor poll showed China was the new consensus sell.

Analysts at Rabobank pointed out that the U.S. yield curve has now been “inverted” for a full 12 months. Inversions are a traditional recessionary warning signal and parts of this one have been the most extreme since the 1980s.

The move up in Treasury yields put the 10-year note at 3.969 percent, its highest since early March, when turmoil in the U.S. banking sector sent investors scrambling to the safety of government bonds.

Germany’s 10-year yield, the benchmark for the eurozone, was up near the top of its recent range too, at 2.52 percent.

The lagged effects of interest rate moves made it incredibly difficult for central banks like the Fed to now judge whether they had done enough, too much or not enough, said Peter Spiller, the chief investment officer of CG Asset Management.

“The chances of them getting it exactly right? History is not encouraging,” Spiller said.

“The word I like to use is fragile,” he added, referring to the global economic outlook. “At this level it really is very fragile.”

The latest flare-up of tension between the United States, Europe, and China had also hit the mood.

U.S. Treasury Secretary Janet Yellen was kicking off a trip to China just days after Beijing slapped export curbs on some key metals used in microchips and signalled as well that the move was “just a start.”

The Hang Seng index in Hong Kong, where many of the big Chinese firms are listed, tumbled more than 3 percent overnight and Japan’s Nikkei fell 1.6 percent, having recently hit a 33-year high.

“Sentiment has soured for equity bulls as Sino–U.S. relations take another step backwards and investors adjusted to the fact that the Fed remains more hawkish than hoped,” said Matt Simpson, a market analyst at City Index.

“The Fed’s decision to pause (rate hikes) was not actually unanimous and most members are up for further hikes,” he added, referring to the meeting minutes the U.S. Fed published on Wednesday.

While almost all Fed officials agreed to hold interest rates steady last month, the minutes shown the vast majority expected further increases eventually. Money market traders now see an 85 percent chance of a quarter-point hike at the bank’s next meeting on July 26, and about a 50/50 chance of another by November.

Value Point

U.S. E-mini stock futures pointed to a 0.4 percent lower restart for the S&P 500, following its drop of 0.2 percent on Wednesday.

In the commodity markets, Brent crude futures bounced 40 cents, or 0.5 percent, to $77 a barrel. That was well within its range of $72 to $78 for the last couple of months as demand concerns have been balanced by Saudi Arabia and Russia cutting output.

The U.S. dollar index—a measure against the world’s other top six currencies—was also trickling lower.

Japan’s beaten-up yen was driving the move. Its biggest rise in almost a month took it to 143.9 to the dollar and followed the almost daily warnings from Japanese officials about the currency’s recent weakness.

CG Asset Management’s Spiller said the yen, in terms of purchasing power parity, was now a staggering 50 percent out of line after its fall this year. “The value point is so powerful here that I am prepared to own yen,” he said.

By Marc Jones