A two-day unloading of U.S. Treasuries pushed their yields to multi-year peaks on Thursday as robust economic data and hawkish speeches by Federal Reserve officials stoked concerns about inflation, and stock markets sank globally.
The yield on the benchmark 10-year note hit a high of 3.232 per cent following data released the previous day that was seen as increasing the odds a Friday payrolls report would also be stronger than expected.
Fed Chairman Jerome Powell said the economy can expand for “quite some time,” which also helped the yield curve steepen to its highest in two months.
Stocks, in turn, have fallen broadly.
Based on the latest available data, the Dow Jones Industrial Average fell 201.05 points, or 0.75 per cent, to 26,627.34, the S&P 500 lost 23.91 points, or 0.82 per cent, to 2,901.6, and the Nasdaq Composite dropped 145.58 points, or 1.81 per cent, to 7,879.51.
The CBOE Global Markets volatility index .VIX, known as Wall Street’s “fear gauge,” rose 4.12 points, its highest surge since Aug. 15.
Canada’s main stock index fell on Thursday amid broad-based declines led by financial and energy companies.
The Toronto Stock Exchange’s S&P/TSX composite index was down 65.37 points, or 0.41 per cent, at 16,006.67.
Nine of the index’s 11 major sectors were lower. Only industrials and telecommunications finished higher.
The energy sector was down 0.7 per cent as oil prices dipped on the prospect of a rapid production boost from Saudi Arabia and Russia.
Financials slipped 0.4 per cent with shares of Manulife Financial Corp. dropping 2.8 per cent after Carson Block, who runs Muddy Waters, announced a short position in the insurer Thursday.
Health care stocks fell 3.1 per cent, led by a 6.8-per-cent decline in Bausch Health Companies Inc.
Globally, the pan-European FTSEurofirst 300 index lost 1.02 per cent and MSCI’s gauge of stocks across the globe shed 1.22 percent.
The surge in Treasury yields has also prompted a rise in government bond yields across the globe.
“We saw very large overnight volumes during both the Tokyo and London trading hours, which was a catch-up in foreign sovereign markets to the very large sell-off in U.S. Treasuries yesterday,” said Jon Hill, U.S. rates strategist at BMO Capital Markets.
Euro zone bond yields rose sharply, tracking their U.S. counterparts, while the “trans-Atlantic spread” between United States and German 10-year bond yields hit a three-decade high of around 275 bps.
The U.S. dollar weakened against the euro and yen but lingered near recent highs as investors digested U.S. economic data and Powell’s remarks.
The dollar index rose 0.01 per cent, with the euro up 0.3 per cent to $1.151. The Japanese yen strengthened 0.60 percent versus the greenback at 113.87 per dollar.
Investors will now eye the U.S. government’s September payroll report scheduled for release on Friday.
“That sense of the market’s rising discomfort about inflation risks leads me to expect the wage inflation reading within the U.S. nonfarm payrolls on Friday will be critical to the current sell-off,” wrote Brian Daingerfield, macro strategist at NatWest Markets.
The exception of the day was Italy, where borrowing costs dropped for a second day after the government said it would cut budget deficit targets from 2020 and reduce its debt over the next three years.
Prime Minister Giuseppe Conte on Wednesday confirmed a deficit target of 2.4 per cent of gross domestic product in 2019 and said it would fall to 2.1 per cent in 2020 and 1.8 per cent in 2021.
The estimates for 2020 and 2021 were lower than those initially reported, bringing further relief to bond markets rattled by the new government’s plans to ramp up spending.
Oil prices fell on Thursday as the prospect of increased crude production from Saudi Arabia and Russia prompted profit-taking the day after futures hit four-year highs on a boost from imminent U.S. sanctions on OPEC’s No. 3 producer Iran.
Brent crude futures fell $1.71, or 1.98 per cent, to settle at $84.58 a barrel. On Wednesday, Brent rose to a late 2014 high of $86.74.
U.S. West Texas Intermediate (WTI) crude futures fell $2.08 to settle at $74.33 a barrel, a 2.72-per-cent loss.
Market participants took profits after Brent on Wednesday climbed to the most technically overbought level since February 2012. WTI was the most overbought since January. The relative strength index (RSI) for both Brent and U.S. crude rose this week to above 70, a level often regarded as signaling a market that has risen too far.
On Thursday, both contracts’ RSI retreated to below 70.
Weighing on oil prices, U.S. stock market indexes broadly fell, with the benchmark S&P 500 on pace for its biggest one-day drop since late June. Crude futures at times track with equity markets.
Also pressuring oil prices, crude inventories at the U.S. hub of Cushing, Okla., rose about 1.7 million barrels from Sept. 28 to Tuesday, traders said, citing a report from market intelligence firm Genscape.