Stocks Lose Steam, Bond Markets Suggest Pain Ahead for US Economy

A man stands on an overpass with an electronic board displaying the Shanghai and Shenzhen stock indices, at the Lujiazui financial district in Shanghai, China January 6, 2021. REUTERS/Aly Song//

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  • The euro STOXX 600 falls 0.5%
  • US Bond Market Signals Ahead of Economic Pain
  • 10-year Treasury bonds fall
  • Previous negotiations between Ukraine and Russia boosted the actions
  • Wall street futures fall

LONDON, March 30 (Reuters) – European stocks fell on Wednesday after three straight days of gains, as signs in bond markets that the U.S. economy will suffer ahead dimmed hopes of a negotiated end to the Ukraine conflict.

The spacious Euro STOXX 600 (.STOXX) it fell 0.6% after three positive sessions that had returned the index to the levels reached before Russia invaded Ukraine.

Benchmarks in Frankfurt (.GDAXI) and Paris (.fchi) lost 1.5% and 1% respectively, with London shares (.FTSE) also slipping a touch. Among the individual actions, Ericsson (ERICb.ST) shares fell 0.7% after investors publicly berated his boss and over a scandal involving possible payments to Islamic State. Read more

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Bond investors had bet overnight that aggressive policy tightening by the US Federal Reserve could hurt the world’s largest economy in the long run.

The widely followed 2-year and 10-year US Treasury yield curve briefly inverted on Tuesday for the first time since September 2019.

Longer-term yields falling below shorter ones indicate a lack of faith in future growth, and 10-year yields fall below 2-year rates, which is seen as a harbinger of recession.

Market participants said the signals coming from bond markets were at odds with the mood in equity markets.

“It’s a complete departure from fixed income and the stock market,” said Sebastien Galy, senior macro strategist at Nordea Asset Management.

“Equity markets are too bullish and fixed income markets are probably too bearish.”

In recent decades, an inverted Treasury curve has been followed by a recession in two years, including the 2020 recession caused by the COVID-19 pandemic.

US yield curve inverts

A day after rising above 0% for the first time since 2014, Germany’s two-year bond yield rose six basis points to 0.01%, keeping the previous day’s highs in sight.

Stocks rose across Asia and Wall Street overnight after Ukraine on Tuesday proposed adopting a neutral status, seen as a sign of progress in face-to-face peace talks. Read more

On the ground, however, reports of attacks continued and Ukraine reacted skeptically to Russia’s promise in negotiations to reduce military operations around kyiv.

MSCI’s broadest index of Asia-Pacific stocks outside of Japan (.MIAPJ0000PUS) it rose 1.3% to its highest level in nearly a month, with most Asian stock markets in positive territory.

However, the rally fizzled, with US S&P 500 futures turning negative and pointing to losses of around 0.3%.

“I am very concerned that US equities are not pricing in any risk of a downturn in the US economy, that is extremely worrying,” said Ludovic Colin, senior portfolio manager at Swiss asset manager Vontobel.

The MSCI World Equity Index (.MIWD00000PUS)which tracks stocks in 50 countries, rose 0.1%.

JAPAN IN FOCUS

The US benchmark 10-year yield last stood at 2.4128%, having risen as high as 2.557% on Monday to hit its highest level since April 2019 as traders positioned themselves to rapid interest rate increases by the US Federal Reserve

The impact of rising US yields manifested itself elsewhere, dragging Japanese government bond yields in its wake in a threat to Japan’s ultra-loose monetary policy.

The Bank of Japan ramped up efforts to defend its key yield cap on Wednesday, offering to increase government bond purchases across the curve, including unscheduled emergency market operations. Read more

The widening gap between US and Japanese yields has caused the yen to weaken considerably, but it managed to recover some lost ground on Wednesday.

The Japanese currency rose 0.9% to 121.80 per dollar, compared with Monday’s low of 124.3, amid concerns that Japanese authorities may intervene to boost the yen.

In other currency markets, the euro rose 0.6% to $1.1157, its highest level in four weeks, on the back of peace talks between Russia and Ukraine.

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Reporting by Tom Wilson in London, additional reporting by Dhara Ranasinghe and Alun John in Hong Kong Editing by David Goodman and Bernadette Baum

Our standards: The Thomson Reuters Trust Principles.

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