SINGAPORE/LONDON—U.S. Treasury yields held near multiyear highs on Friday, with markets seeing no let-up in tightening from the Federal Reserve, causing shares to slip and the dollar to stay strong, particularly against the embattled Japanese yen.
The benchmark U.S. 10-year yield edged up as high as 4.276 percent, its highest level since June 2008, having risen nearly 10 basis points overnight.
This dragged on shares, with Europe’s STOXX index falling 1.5 percent, U.S. S&P500 futures sliding 0.6 percent, and MSCI’s broadest index of Asia-Pacific shares outside Japan down 0.88 percent, languishing near the two-and-a-half year intraday low it touched the day before.
“It’s all so tenuous ... The problem is the macro environment still remains difficult,” said Shane Oliver, chief economist at AMP Capital, adding that the market is in a tug of war between investors who see opportunities and those who are focused on the difficult backdrop.
Global markets have been extremely volatile as investors worry that hefty rate hikes will push major economies into recessions before inflation is tamed, while the resulting stronger dollar could wreak havoc in emerging markets.
Philadelphia Federal Reserve President Patrick Harker on Thursday suggested the central bank will “keep raising rates for a while,” while U.S. economic data showed persistent labor market tightness.
“This rate environment continues to (cast) doubts (on) the sustainability of any rally in equities, and chances that the dollar will receive more safe-haven flows are elevated,” said Francesco Pesole foreign exchange strategist at ING in a note to clients.
Furthermore, third-quarter corporate earnings have offered little help to equities. On Friday Adidas shares dropped 8 percent as the German sporting goods maker cut its full-year outlook, citing weaker demand.
European retail shares were down 3 percent also hurt by Friday data showing British shoppers reined in their spending more sharply than expected in September.
Yen Keeps Weakening
Higher U.S. yields were also being felt in currency markets, where the yen weakened to a fresh 32 year low of 150.64 per dollar and was heading for its 13th straight session of declines.
The Japanese currency is particularly sensitive to moves in U.S. yields as the Bank of Japan has a policy of keeping benchmark Japanese government bond yields near zero.
Fresh threats of intervention to support the yen made by Japanese policymakers have kept investors on alert, although there has been no official announcement of further action since the Ministry of Finance’s dollar-selling, yen-buying intervention last month.
Sterling was also under pressure, down 0.75 percent against the dollar as Conservative lawmakers jostled to replace Liz Truss, after initially rising when she announced that she was stepping down as prime minister.
“The pound rally yesterday has fully reversed as investors conclude the resignation of Liz Truss as prime minister does not necessarily mean political uncertainty will be removed,” noted MUFG head of global markets research for EMEA Derek Halpenny.
Brent crude slid 1.2 percent and spot gold was down 0.4 percent and set for its second weekly decline.
