PARIS: Stock markets slid on Monday, extending last week’s sell-off on fears of widening conflict in the Middle East and worries that US interest rates will remain elevated for longer than initially thought.
The concerns about US interest rates have also been affecting bond markets, with the yield on 10-year US government bonds rising above 5.0 percent for the first time since 2007 during the height of the subprime mortgage crisis according to Factset data.
Wall Street moved lower initially with CFRA Research investment strategist Sam Stovall forecasting that ongoing rates worries mean “the US equity market should remain under pressure.”
European stock markets extend losses at open
About two-and-a-half hours into trading, the Dow Jones Industrial Average was flat at 33,127.81 points in a week bringing earnings notably for tech giants Amazon and Microsoft, as well as industrial heavyweights General Motors and Boeing.
The broad-based S&P 500 and the tech-rich Nasdaq were just into the green after sagging slightly in early trading while oil prices eased.
“It’s been a jittery start to the week, with the continued rise in US yields making investors very nervous about what challenges lie ahead for the economy” said Craig Erlam, senior market analyst with OANDA, questioning how long the US economy could remain resilient if rate cuts are pushed “further and further into the future.”
“The trajectory of US Treasuries is not merely a question; it is the only question for financial markets,” said Stephen Innes, managing partner at SPI Asset Management, in a note to clients.
“US government bonds are the critical benchmark reference point against which virtually all other global assets are ultimately priced off,” he added.
Fed playing ‘the prudence card’
US Federal Reserve officials have indicated that interest rates may need to stay higher for longer than previously thought to push down persistent inflation as the US economy remains buoyant.
“The rise in long-term yields is due in part to the resilience of the US economy and the fact the Fed, even if it plays the prudence card, continues to emphasise the possible need of further tightening of monetary policy,” said Sebastian Paris Horvitz, director of research at LBP Asset Management.
The yield on 10-year Treasuries underpins much commercial borrowing, so the rise will filter through to higher borrowing costs for businesses and consumers, which is negative for risk assets like stocks.
The rising yield on the secondary market is also an indication that the US government will face higher borrowing costs when it next sells bonds.
There was little movement on Europe’s bourses, with London finishing just off while Paris and Frankfurt nudged into the green.
Oil prices lost around one percent as Israel’s expected ground offensive against Hamas in Gaza was delayed, with diplomats trying to secure the release of more hostages and some suggesting this could change Tel Aviv’s strategy.
Uncertainty caused by the crisis – sparked by Hamas’s deadly October 7 attack, followed by weeks of Israeli bombardment of Gaza – has seen risk assets tumble with the Vix fear gauge hitting its highest level since March.
While the fear remains that other countries including Iran could be drawn into a regional conflagration, Israel holding off on a ground attack has provided a shaft of light for the crude market.
Oil is “taking a breather while the focus (is) on humanitarian aid and securing hostage releases suggest that a potential ground invasion from Israel can wait”, Yeap Jun Rong at IG Asia said.
“That may contain the risks of further escalation, at least for now.”
Key figures around 1400 GMT
New York - Dow: FLAT at 33,127.81 points
London - FTSE 100: DOWN 0.4 percent at 7,374.83 points (close)
Frankfurt - DAX: UP 0.02 percent at 14,800.72 (close)
Paris - CAC 40: UP 0.5 percent at 6,850.47 (close)
EURO STOXX 50: UP 0.4 percent at 4,041.48
Tokyo - Nikkei 225: DOWN 0.8 percent at 30,999.55 (close)
Shanghai - Composite: DOWN 1.5 percent at 2,939.29 (close)
Hong Kong - Hang Seng Index: Closed for holiday
Dollar/yen: DOWN at 149.80 yen from 149.84 yen on Friday
Euro/dollar: UP at $1.0646 from $1.0598
Pound/dollar: UP at $1.2232 from $1.2164
Euro/pound: DOWN at 87.01 pence from 87.17 pence
West Texas Intermediate: DOWN 1.0 percent at $87.21 per barrel
Brent North Sea crude: DOWN 0.6 percent at $91.58 per barrel
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