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Picture: 123RF/chipus
Picture: 123RF/chipus

World stocks fell for a third straight day on Thursday after Federal Reserve meeting minutes bolstered bets on another US rate hike this month. Tit-for-tat trade salvos between China and the US also dampened sentiment.

Traders watched the traditional driver of global borrowing costs, the 10-year US 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% 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 shows China is the new consensus sell.

Analysts at Rabobank pointed out that the US yield curve has now been “inverted” for a full 12 months. Inversions, where interest rates on longer-dated debt are lower than short-term paper, 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%, its highest since early March, when turmoil in the US 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%.

The lagged effects of interest rate moves made it incredibly difficult for central banks to now judge whether they had done enough, too much or not enough, said Peter Spiller, the CIO 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 US, Europe and China also hit the mood.

US Treasury Secretary Janet Yellen starting a trip to China just days after Beijing imposed export curbs on some crucial metals used in microchips and signalled 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% overnight and Japan’s Nikkei fell 1.6%, having recently hit a 33-year high.

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

“The Fed’s decision to pause [rate hikes] wasn’t unanimous and most members are up for further hikes,” he added, referring to the meeting minutes the Fed published on Wednesday.

While almost all Fed officials agreed to hold interest rates steady last month, the minutes show the vast majority expected further increases eventually. Money market traders now see an 85% 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

US e-mini stock futures pointed to a 0.4% lower restart for the S&P 500, after a drop of 0.2% on Wednesday.

The 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/$ and came after 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% out of line after its fall this year. “The value point is so powerful here that I am prepared to own yen,” he said.

Reuters

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