Euro Extends Gain, Bonds Drop; Europe Stocks Slump: Markets Wrap

Nassos DrakosGlobal Markets

The euro touched a one-year high and government bond yields climbed as investors digested a series of hawkish messages from central banks. European stocks sank as the global selloff in technology companies spread.

The single currency hit the highest level since last year’s Brexit vote and most bonds extended declines as Monday’s upbeat remarks from ECB chief Mario Draghi continued to feed into the European market. Janet Yellen added to the momentum as she noted asset valuations look rich and signaled the U.S. economy can withstand higher interest rates, and Treasury yields rose again after the biggest increase since January. Oil’s winning streak ended as industry data showed American stockpiles rose.

Traders appear to be reappraising the outlook for global borrowing costs and monetary policy in the wake of the comments from the usually dovish Draghi. While Yellen qualified her assessment that asset valuations look high by some measures, the note of caution came just as markets were buffeted by a series of events, including an IMF cut to its U.S. growth forecast, Google suffering the biggest ever EU antitrust fine, a fresh blow to the Republican agenda in Washington and a global cyberattack.

“Central banks taking the punch bowl of liquidity away does not bode well for the outlook for volatility in the short term, leading to position adjustments,” Morgan Stanley strategists including Hans Redeker wrote in a note. “Conditions for the emergence of a proper bear market are not yet in place, even so, yesterday’s high trading volume suggests that corrective activity may stay with us for several days.

Here’s what lies ahead for investors:

  1. The Federal Reserve is set to announce the results of the second part of its annual bank stress test, which will determine whether lenders can increase dividends and share repurchases.
  2. China’s PMI might have declined in June after unexpectedly remaining unchanged in May, reflecting government offers to cut overcapacity and leverage. That reading is due Friday.
  3. Also slated this week: Japanese inflation, factory output, unemployment, household consumption and housing starts.

Here are the main moves in markets:

Currencies 

  1. The euro rose 0.3 percent to $1.1373 as of 7:27 a.m. in New York, after briefly touching $1.1379, the highest level since June 2016. The currency surged 1.4 percent on Tuesday
  2. The Bloomberg Dollar Spot Index lost 0.2 percent after declining 0.6 percent in the previous session.
  3. The Canadian dollar strengthened 0.9 percent, adding to a 0.4 percent gain on Tuesday. Bank of Canada Governor Stephen Poloz said in a CNBC interview that interest rate cuts “have done their job” and that levels are now “extraordinarily low.”

Stocks

  1. The Stoxx Europe 600 Index fell 0.4 percent, with technology shares tumbling 1.1 percent.
  2. Futures on the S&P 500 Index added 0.1 percent. The underlying gauge lost 0.8 percent Tuesday, the most since May 17, as technology and health-care shares declined.

Bonds

  1. The yield on 10-year Treasuries added four basis points to 2.24 percent after jumping seven basis points Tuesday.
  2. The yield on German bunds rose one basis point, after climbing 13 basis points in the previous session for the biggest surge since December 2015. British yields rose five basis points.

Commodities

  1. WTI futures fell 0.3 percent to $44.10 after climbing 4 percent in the previous four sessions.
  2. Gold rose 0.5 percent to $1,253.64 an ounce, climbing for a second day.

Asia

  1. The MSCI Asia Pacific Index fell 0.4 percent as declines in technology shares overshadowed gains in banks and raw-materials companies. Samsung Electronics Co., Taiwan Semiconductor Manufacturing Co. and Tencent Holdings Ltd. led the selloff with losses of at least 1.2 percent.
  2. The yuan continued to rise on speculation of central bank intervention, with the offshore currency up 0.2 percent after surging 0.6 percent Tuesday.

Source: Bloomberg.com