By Lawrence Delevingne, Saikat Chatterjee and Tommy Wilkes
BOSTON/LONDON (Reuters) -Wall Street took a breath on Wednesday, pushing stocks and Treasury yields down after both had powered higher earlier in the week as investors took in the strength of the economy and hawkish comments from U.S. policymakers.
Two-year U.S. Treasury yields are up sharply so far in March and set for their biggest monthly jump since 2004. Investors have been relatively sanguine about the implications of higher yields on stock market valuations, with many choosing to buy back in after a bruising few months for equity prices.
That narrative took a pause on Wednesday as U.S. stocks fell in morning trading. The Dow Jones Industrial Average fell 238.35 points, or 0.68%, to 34,569.11, the S&P 500 lost 20.62 points, or 0.46%, to 4,490.99 and the Nasdaq Composite dropped 40.81 points, or 0.29%, to 14,068.01.
European stocks fell nearly 1%, with a pan-European equity benchmark hitting a new 1-month high in early London trading before they fell back as traders took profits.
MSCI’s broadest gauge of world stocks declined 0.4%, but kept near levels last seen in mid-February just before Russia invaded Ukraine.
Some previously bullish investors are worried about the impact of rising interest rates on the outlook for stocks.
“Although there is widespread criticism, it’s too early to take the view that the Fed won’t be able to negotiate the fine line of reducing inflation without derailing growth,” said Mark Haefele, Chief Investment Officer, UBS Global Wealth Management.
“Given a higher degree of uncertainty, rather than make a directional play on stocks moving higher, we prefer selected overweight and underweight positions, yielding an overall neutral allocation to equities.”
BOND SELL-OFF
The most eye-catching moves recently have been in the bond market, although there was some reversal on Wednesday. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 0.4 basis points (bps) at 2.150%. The yield on 10-year Treasury notes was down 2.4 bps to 2.353%.
The sharp rise in short-dated yields has flattened the gap between two and 10-year U.S. yields to its lowest levels since the coronavirus pandemic hit global markets in March 2020. An inverted yield curve is widely seen as a predictor of future U.S. recessions.
The sell-off in short-dated yields prompted fed fund futures to price in an aggressive 190 bps of interest rate rises through the remainder of the year after a 25 bps rate hike last week. Futures were nearly pricing in the probability of a 50 bps hike in May.
The sell-off in U.S. markets has reverberated elsewhere, with German and British bond yields climbing this week.
Currency market activity continued to be relatively subdued, confirming the lack of any clear directional trends.
Against the U.S. dollar, the yen was up slightly by 1500 GMT/1100 ET, but held around 121 yen after Bank of Japan Governor Haruhiko Kuroda said it was premature to debate the exit from ultra-loose monetary policy.
The euro and sterling both fell about 0.4% against a broadly stronger dollar.
Oil prices rose in volatile trading on Wednesday, supported by disruption of Russian and Kazakh crude exports. U.S. crude surged 5.37% to $115.14 per barrel and Brent was at $121.92, up 5.58% on the day.
Gold prices also gained on Wednesday as investors looked to shield against soaring inflation and uncertainty caused by events in Ukraine, with elevated U.S. bonds yields capping gains in non-interest bearing metal. Spot gold added 0.5% to $1,930.77 an ounce.
(Reporting by Lawrence Delevingne in Boston, Saikat Chatterjee and Tommy Wilkes in London; Editing by Nick Macfie and Alex Richardson)