Reuters, NEW YORK/LONDON, August 22 – The safe-haven dollar remained steady at 10-week highs on Tuesday as a rally in international equities faded as benchmark Treasury yields touched a nearly 16-year high on worries that interest rates would rise for longer.
In order to finish flat, the MSCI All Country stock index gave up previous gains, moving further away from its 2-1/2 month low.
The Nasdaq Composite Index barely changed, the Dow Jones Industrial Average dropped 0.51%, and the S&P 500 lost 0.28%.
When policymakers from the Federal Reserve, the European Central Bank, the Bank of England, and the Bank of Japan travel to Jackson Hole, Wyoming, later this week for their annual central bank conference, the markets are anticipating additional cues from these decision-makers over the outlook for interest rates.
Powell “is unlikely to give direction on September, but he is likely to hint at elevated rates for longer to ensure that inflation has come down,” analysts at TD Securities wrote in reference to the Fed’s upcoming policy meeting in September.
A surge in tech equities contributed to a 0.7% increase in all of Europe’s markets.
However, U.S. Treasuries once more stole the show as benchmark 10-year rates rose to 4.366%, their highest level since 2007, and nearly 40 basis points higher month to date, before falling back to 4.318%.
The financial markets are in a more cautiously upbeat attitude, according to Fiona Cincotta, senior markets analyst at City Index in London.
She said that the outlook, particularly for equities, remained difficult.
She continued, “We had an optimistic July, and now there’s an understanding that what the Fed has been saying about higher rates for longer will ring true.
Following unexpectedly positive U.S. economic news that has caused investors to lower expectations for the Federal Reserve to soften policy next year, yields, which move inversely to prices, have increased.
Before the Tuesday comeback, investor enthusiasm in stocks had recently been dampened by concerns about interest rates rising for the foreseeable future and China’s deteriorating economy.
Treasury futures currently predict that the Fed will lower rates by 100 basis points (bps) by the end of 2024 as opposed to 130 bps a few weeks ago.
The fact that inflation expectations haven’t changed in tandem with the rise in “real” yields, which discount inflation predictions, is likely to cause investors to rethink taking risks.
The Jackson Hole symposium and the 20-year Treasury auction are looming large later this week, so there is little motivation to take the opposite side, according to Padhraic Garvey, regional head of research, Americas at ING.
According to Vishnu Varathan, head of economics at Mizuho Bank in Singapore, the over 300 bps added to 10-year U.S. real yields since September 2021 is the most acute tightening of real rates in 25 years. Late last week, the 10-year real rate surpassed 2%.
Benchmark bond yields in Europe decreased after Monday’s steep increase in Germany, France, and Italy.
At 0.665%, the yield on Japan’s 10-year government bonds reached a level that had led the Bank of Japan to intervene in the market earlier this month. This was a more than nine-year high.
The IT sector saw a 2% increase in European stocks as investors grew upbeat about Nvidia, the most valuable chipmaker in the world, ahead of its quarterly reports on Wednesday.
Additionally, the IT boom had helped Asian stock exchanges, with the Hang Seng ending a seven-day losing trend to close 1% higher.
After S&P Global late on Monday reduced credit ratings and revised its outlook for several lenders, following a similar action by Moody’s, attention turned to U.S. banking equities. The sector’s credit strength will likely be put to the test by funding risks and lower profitability, they predicted.
While markets are on the lookout for interventions, the yield changes have also put pressure on those currencies with lower yields.
The dollar index, which compares the value of the dollar to six developed-market currencies, increased little to 103.60, only a hair’s breadth below the 10-week highs reached on Friday at 103.68. To reach $1.08460, the euro lost 0.45%.
After exhibiting signs of stabilisation after state banks previously used the offshore forwards market to defend it, the Chinese yuan gradually depreciated again to approximately 7.30 per dollar.
The meeting between Bank of Japan president Kazuo Ueda and the prime minister gave the yen, which was also under intervention watch, a slight lift. The price per dollar was last somewhat higher, at 145.855.
(Editing by Chizu Nomiyama, William Maclean, and Cynthia Osterman; reporting by Karin Strohecker; additional reporting by Elizabeth Howcroft, Dhara Ranasinghe, and Tom Westbrook)