European equities are falling, the yen is hitting a 20-year low, while US interest rate rises are threatening
European equities are falling, the yen is hitting a 20-year low, while US interest rate rises are threatening

European equities are falling, the yen is hitting a 20-year low, while US interest rate rises are threatening

LONDON, April 19 (Reuters) – European equities were lower on Tuesday, while yields on 10-year US inflation-linked bonds were close to positive for the first time in two years, as the outlook for an aggressive Fed tightening to curb inflation kept investors on edge.

Investors were also preparing for the next burst of corporate earnings, which will help them assess the impact of the Ukraine war and a rise in inflation.

Heineken (HEIN.AS)Nestlé (NESN.S) and Renault (RENA.PA) report out of Europe this week. Netflix (NFLX.O)Tesla (TSLA.O) and Verizon is scheduled to report this week from the United States.

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Yields on 10-year US inflation-linked bonds held close to the two-year highs they reached on Monday, and are within touching distance of becoming positive for the first time since the onset of the pandemic.

Equity investors had been reassured by the fact that bond yields had been deep in negative territory when removing the effects of inflation, but that seems to be over.

US Dividend Yield vs. UST

1035 GMT, the pan-European STOXX 600 (.STOXX) fell 1.1%, Germany’s DAX (.GDAXI) fell 0.9% and the UK’s FTSE 100 was 0.4% lower – although analysts warned of over-interpretation movements given lower liquidity over the long Easter weekend.

MSCI World Stock Index (.MIWD00000PUS), which tracks stocks in 50 countries, was 0.3% lower. S&P 500 futures fell 0.3% and Nasdaq futures fell 0.4%.

The Federal Reserve almost looks set to raise interest rates by 50 basis points when it meets next month, and a 75 basis point increase is not out of the question.

St. Louis Federal Reserve President James Bullard reiterated his argument for raising interest rates to 3.5% by the end of the year on Monday, adding that a 75 basis point increase should not be ruled out, even if this was not his baseline scenario. Read more

“I think it’s a good reminder to the markets that it’s actually possible, but he’s known for his high-minded views, so you have to take that into account, too,” said Baylee Wakefield, multi-asset portfolio manager at Aviva Investors.

Wakefield added that recent developments in Ukraine, where Russia has launched a new offensive in the east, have an impact on markets in terms of volatility.

The dollar index rose above 101 for the first time since March 2020, when the dollar hit a 20-year high against the yen and tested a two-year high on the euro, amid higher US government interest rates.

The divergence in monetary policy between Japan and the United States has pushed the yen to its weakest level against the dollar since 2002 at 128,465.

“Japan is looking to continue to stimulate the economy, which is a pretty stark contrast to what we see in the US with more aggressive tightening expected,” Wakefield added.

The leading 10-year government interest rate was last at 2.8877% after previously reaching its highest level since the end of 2018 at 2.909%. The 30-year US government bond yield rose above 3.0% for the first time since early 2019.

German bond yields followed their US counterparts, with the European Central Bank’s non-committal tone last week leaving German bonds exposed to US bond sales.

Germany’s 10-year government bond yield rose 7.9 basis points (bps) to 0.916%, the highest since July 2015.

Oil prices fell but remained close to highs since mid-March as investors worried about tight global supply after Libya was forced to halt some oil exports as forces in the east expanded their blockade of the sector. Read more

Brent crude oil futures last fell 1.3% to $ 111.66 per share. barrel. Futures on U.S. crude oil fell 1.5% to $ 106.57 per share. barrel.

Gold prices were stable after reaching close to $ 2,000 per share. ounce during Monday’s session. Spot gold was last at $ 1,976.04 an ounce.

Inflation
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Reporting by Samuel Indyk and Elizabeth Howcroft Editing by Mark Potter and Barbara Lewis

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