The dollar hit a six-day high following the jump in Treasury yields, while inflation fears were bolstered as crude prices rose to their highest since 2014 on potential supply disruptions after attacks in the Persian Gulf increased a tight supply outlook. The big technology stocks were slammed on Wall Street and in Europe by the jump in Treasury yields, while Goldman Sachs led declines among U.S. banks after posting quarterly earnings below expectations. Two-year Treasury yields, which track short-term rate expectations, rose above 1% for the first time since February 2020 as traders priced in a more hawkish Fed before the U.S. central bank’s policy meeting next week. The two-, three- and five-year part of the yield curve will bear the brunt of anticipated Fed policy, said Tom di Galoma, a managing director at Seaport Global Holdings in Greenwich, Connecticut. “The front end of the market is still way underpriced for Fed tightenings. The two-year note could be 1.5% by March,” he said.
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Following the spike in Treasury yields, the dollar hit a six-day high, while inflation fears were strengthened as crude prices surged to their highest level since 2014 on fears of supply interruptions following the strikes in the Persian Gulf, which exacerbated a tight supply outlook. The increase in Treasury yields rocked the main technology stocks on Wall Street and in Europe, while Goldman Sachs led the falls among U.S. banks after reporting quarterly earnings that fell short of forecasts. On Tuesday, traders braced for the Federal Reserve to be more aggressive in tightening monetary policy to combat inflation, sending benchmark U.S. Treasury rates to two-year highs and major equity market indexes down more than 1%.
The two-year Treasury yield was up 5.7 basis points at 1.024% and the yield on the benchmark 10-year Treasury note was up 6.9 basis points to 1.841%. Yields have jumped since hawkish minutes from the Fed’s policy meeting in December showed it may raise rates sooner than expected and begin reducing its asset holdings to slow inflation and address a “very tight” labor market.
The tech-centric mega-cap stocks led the decline on Wall Street and interest-rate-sensitive financials were the biggest declining S&P 500 sector, down about 2.2%. Tech stocks also weighed the most in Europe, falling 1.9%, as European shares fell to their lowest level in more than a week. The pan-European STOXX 600 index pared some losses but still traded 0.91% lower. On Wall Street, the Dow Jones Industrial Average slid 1.49%, the S&P 500 fell 1.63% and the Nasdaq Composite slipped 1.99%. MSCI’s all-country world index fell 1.41%. There were overnight drops for Asia’s big tech names too despite China easing policy again. “The million-dollar question is how quickly the Fed will move,” said Hans Peterson, global head of asset allocation at SEB investment management. “I’m not sure. The only thing I’m sure of is that (global economic) growth is quite good. And when you lack conviction you decrease your bets,” Peterson said. Investors are increasingly pricing in as many as four Fed hikes this year and even one from the European Central Bank.
Oil was the only positive sector on Wall Street as Brent crude prices hit $88 a barrel – their highest in more than seven years – after Yemen’s Houthi group attacked the United Arab Emirates. It escalated hostilities between the Iran-aligned group and a Saudi Arabian-led coalition. The Houthis warned they could target more facilities, while the UAE said it reserved the right to “respond to these terrorist attacks”. “If current geopolitical tensions continue and OPEC+ members can’t deliver on their 400,000 barrel per day increase, macros coupled with the strong technical outlook could see prices push toward the $100 mark,” CMC Markets’ analyst Ash Glover said. Brent crude was up $0.75 at $87.23 a barrel. U.S. crude was up $1.21 at $85.03 a barrel.
Overnight, MSCI’s broadest index of Asia-Pacific shares outside Japan had edged higher early in the session, before turning and finishing down 0.5% in the afternoon. Japan’s yen fell after the Bank of Japan said it would stick to its ultra-loose monetary policy, despite hopes the economy is finally kicking clear of deflation. Gold was flat and in emerging markets, Russia and Ukraine stabilized after fears of another Russian military foray into Ukraine sparked a heavy selloff in recent days. Russia’s rouble, highly volatile recently, firmed 0.92% to 76.77 a dollar after reports the West was no longer considering cutting Russian banks off from the Swift global payments system and was instead eyeing sanctions on banks.