U.S. equity futures moved lower again Tuesday, while the dollar hit a fresh ten month peak and Treasury yields nudged higher, as investors continued to retreat from risk markets amid concerns over higher Federal Reserve interest rates.
Benchmark 10-year Treasury note yields hit a fresh 200y high of 4.55% in overnight trading, with 2-year notes pegged at 5.125%, as investors re-set rate assumptions following last week’s ‘hawkish hold’ from Fed Chairman Jerome Powell, who warned of the need for one final rate hike between now and the end of the year.
The moves have pushed U.S. stocks to their lowest levels of the quarter, with the S&P 500 now down 3.8% for the month, while Bank of America’s weekly ‘Flow Show’ report suggests investors took nearly $17 billion from global equity markets last week, the highest tally of the year, as concerns over a looming government shutdown, the end of a moratorium on student loan payments and rising oil and gas prices look set to blunt U.S. growth prospects into the end of the year and beyond.
That said, with a tight job market and resilient economic performance, traders still feel the Fed is more likely than not to follow-through on its rate hike promise.
“Unless there is a sign that the job market is weakening significantly or that the economy is slowing down quickly, long-term yields will continue to soar,” Saxo Bank strategists wrote Tuesday. “With 10-year yields breaking above 4.5% and selling pressure continuing to mount through an increase in coupon supply, quantitative tightening, and waning foreign investors demand, it’s likely to see yields continue to rise until something breaks.”
Moody’s Investors Service added another element of concern late Monday when it warned that the ongoing risk of a government shutdown, which could come as early as Saturday midnight, may force it to lower the U.S.’s triple-A credit rating.
“Fiscal policymaking is less robust in the U.S. than in many Aaa-rated peers, and another shutdown would be further evidence of this weakness,” Moody’s said in a statement.
That concern hasn’t affected investor appetite for the U.S. dollar, however, which rose to a fresh 10-month high against a basket of its global peers in overnight trading before easing to around 105.962 heading into the morning session.
On Wall Street, meanwhile, futures contracts tied to the S&P 500 were indicating a 20 point opening bell decline while the Dow Jones Industrial Average was looking at a 133 point pullback. The tech-focused Nasdaq was called 85 points lower.
Overnight in Asia, China’s failing property group, Evergrande, reportedly missed payments on an onshore bond and cancelled meetings with creditors that could throw its financial restructuring into further chaos.
The moves hit China stocks and pulled the region-wide MSCI ex-Japan index to a new 10 month low in overnight trading.
In Europe, the Stoxx 600 was marked 0.39% lower in early Frankfurt trading as investors tracked weakening business sentiment data for the month of September from Germany, the region’s largest economy. Britain’s FTSE 100, meanwhile, fell 0.12% in London.
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