Stocks Wilt Under Pressure From Rising Yields

Overview: Higher interest rates, driven by inflation expectations, is forcing an adjustment to equity markets. The S&P 500 is poised to gap lower today following slides in the Asia Pacific region and Europe. Japanese and Taiwanese indices advanced by steep losses were seen in China, Hong Kong, and India. Europe's Dow Jones Stoxx 600 is off about 0.7% in late morning turnover, among its steepest loss here in February. The US 10-year Treasury yield around 1.37%, while European yields are narrowly mixed. Despite the upgrade by S&P to AA+ from AA, New Zealand bonds, like Australian bonds, have sold off hard. Yields jumped 13 and 17 bp respectively and are now up 47 and 55 bp over the past month. The Reserve Bank of Australia was forced to defend its 3-year bond cap for the first time in three months and bought A$1 bln. The US dollar is mixed. The Antipodean currencies and sterling are firmer, while the Swiss franc and Norwegian krone lead the rest lower. Emerging market currencies are also under pressure, with the Mexican peso again the weakest. The JP Morgan, Emerging Market Currency Index fell a little less than 0.2% last week and is off almost twice as much today. Gold snapped a six-day slide at the end of last week with a 0.5% bounce. It is extended the recovery today to test $1800.Crude oil is consolidating inside the pre-weekend range, leaving April WTI trading around $59.60.  

Asia Pacific

There is tension between global investors wanting to invest in China and some US efforts to restrict it, though the Biden administration's stance is not clear. Key indices that serve as benchmarks for international investors did eliminate some Chinese companies after the US banned Americans from investing. Still, the pull is strong.FTSE Russell announced it will add 11 more Chinese companies (from the STAR Market, the NASDAQ-like stock market) to its global benchmarks.  

Some headlines declared that the yuan's share of SWIFT transactions rose to a five-year high last month. It is true, but consider that it accounted for 2.48% of all transactions. The dollar's share, in contrast, was 38.26%, and the euro's share was 36.60%. Sterling and the yen also account for more SWIFT turnover than the yuan. One takeaway is that China cannot weaponize access to the yuan the way the US can to the dollar, which leaves Beijing to rely on trade as it is threatening to do with rare earths. Before the weekend, China announced it would boost the rare earths mining quota by 27% from a year earlier (84k tons vs. 66k for the first part of 2020).

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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