Stocks fall on Fed, gilts drop as interest rate bets climb

BLOOMBERG

Stocks dropped as global markets responded to Federal Reserve commentary that was more hawkish than expected. UK government bonds fell. European and Asian stocks saw broad declines, while contracts on the S&P 500 pointed to a continuation of the losses on Wall Street. In the UK, yields on 10-year government bonds climbed to the highest since the gilts crisis last October, when then Prime Minister Liz Truss’s fiscal plan unnerved markets. Traders are now fully pricing a terminal Bank of England rate of 6.5% by March, the highest level in a quarter century, according to interest-rate swaps data.
Tightening policy also remains an investor concern for the US. Minutes from the June Fed meeting showed division among policymakers over the decision to pause rate hikes, with the voting members on track to take rates higher this month. Traders are also looking ahead to US jobs data that will further illuminate the path for policy. “It’s very difficult for the Fed to be pivoting anytime soon,” said Sue Trinh, co-head of global macro strategy for Manulife
Investment Management, on Bloomberg Television. Prior pivots have occurred with core inflation around half current levels, suggesting more tightening ahead, she said. “We are positioned somewhat more defensively in the shorter term.”
A number of US employment reports will be closely watched this week. The so-called JOLTS report of job openings is expected to show a tapering of available positions and a separate measure of jobless claims is anticipated to tick higher, in a sign of cooling in the labour market. After that, attention turns to the monthly nonfarm payrolls report.
Treasury yields rose across the curve, adding to gains spurred by the Fed minutes. The policy sensitive two-year rate inched up to 4.96%. Meanwhile, Treasury Secretary Janet Yellen touches down in Beijing to attempt to further repair the relationship between the world’s two largest economies.
Elsewhere in China, the central bank extended support for the yuan via a stronger daily reference rate, a day after its flagship newspaper published commentary stating that the country has ample tools to stabilise the weakening currency. Chinese investors don’t expect policymakers to unveil aggressive stimulus or big economic reforms at a key meeting expected later this month, according to Goldman Sachs Group Inc. Traders have been hoping for more after a slew of disappointing data.
“Our base case is a weak stimulus,” Bank of America Corp strategists including Winnie Wu wrote in a note. “We believe the government will need to send clearer signals to support the economy and private sectors, to help rebuild confidence.”
The Stoxx Europe 600 fell 0.8% in London. S&P 500 futures fell 0.5%. Nasdaq 100 futures fell 0.6%. Futures on the Dow Jones Industrial Average fell 0.4%. The MSCI Asia Pacific Index fell 1.3%. The MSCI Emerging Markets Index fell 1.3%.
The Bloomberg Dollar Spot Index was little changed. The euro was little changed at $1.0861. The Japanese yen rose 0.6% to 143.72 per dollar. The offshore yuan was little changed at 7.2575 per dollar. The British pound rose 0.1%  to $1.2717. Bitcoin rose 1.1% to $30,818.73. Ether rose 0.8% to $1,926.47. The yield on 10-year Treasuries advanced three basis points to 3.96%. Germany’s 10-year yield advanced four basis points to 2.52%. Britain’s 10-year yield advanced seven basis points to 4.57%.