Global Stock Markets: Stocks stumble, yields jump on rates outlook; oil rallies

Global stock markets stumbled again on Friday and U.S. Treasury yields climbed as cautious investors worried about how imminent U.S. interest rate hikes would affect the economy.

A warning from the largest U.S. bank JPMorgan Chase & Co that its profitability may fall below a medium-term target cast another pall on Wall Street.

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By early evening, MSCI`s gauge of stocks across the globe had shed 0.36%. The pan-European STOXX 600 index closed down 1.01% and had its worst week since Nov. 26, weighed in part by declines in technology stocks.

In the United States, a spate of bargain hunting toward the end of the day helped stocks to narrow losses. The Dow Jones Industrial Average fell 0.56%, the S&P 500 ended flat, and the Nasdaq Composite flipped into the black, rising 0.59%.

"We are now entering a period where the Federal Reserve will engage in a never-before-seen experiment: raising interest rates off zero and reducing the size of its balance sheet in the same year," said Nicholas Colas, co-founder of DataTrek Research.

"The market is still left wondering what results will come from their decisions," Colas said.

In line with expectations of rising rates, benchmark 10-year Treasury yields jumped to 1.7859%, rebounding toward a two-year high of 1.8080% struck earlier this week. Two-year Treasury yields hit a high of 0.9730%, a level last seen in February last 2020. 

European bond yields also rose in choppy trade as investors focused on monetary policy tightening by central banks, though sharp falls in Germany`s benchmark 10-year yield earlier this week led it to notch its biggest weekly fall in 10 weeks.

Meanwhile, in Asia, the five-year Japanese government bond yield jumped to its highest since January 2016 and the yen rose after a Reuters report that Bank of Japan policymakers are debating how soon they can start an eventual interest rate hike.

Such a move could come even before inflation hits the bank`s 2% target, sources said.

The dollar, which has been slugged by a three-day selling spree as investors bet that expectations of rate rises are already priced into the currency, finally steadied on Friday.

The dollar index, which measures the greenback against a basket of six currencies, bounced 0.34% to 95.167, pulling away further from a two-month low hit this week. [USD/]

A bounce in the dollar dragged on the euro, which lost 0.34% to 1.14135.

Sterling also slipped 0.22% to 1.36780, taking a breather after this week`s rally that pushed it to a 2-1/2-month high.

GDP data on Friday showed that Britain`s economy grew faster than expected in November and its output finally surpassed its level before the country went into its first COVID-19 lockdown.

Asian shares had fallen overnight after Fed Governor Lael Brainard on Thursday became the most senior central banker to indicate the Fed will hike rates in March.

Other Fed officials have shown their willingness to raise rates, after data this week showed U.S. consumer prices surged 7% year-on-year.

Bucking the weakness in equity markets, oil futures rose again, on course for a fourth weekly gain, boosted by supply constraints. [O/R]

Brent crude futures rallied 1.9% to a two-and-a-half month high of $86.44 a barrel. U.S. West Texas Intermediate crude jumped 2.6% to $84.28. Both Brent and U.S. futures entered overbought territory for the first time since late October.

Rising bond yields weighed on non-yielding gold, with spot gold down 0.31% at $1,816.53 per ounce. [GOL/]

"It’s clearly the impact of monetary policy tightening that’s being felt in markets here," said Guillaume Paillat, multi-asset portfolio manager at Aviva Investors.

Paillat, who is expecting at least four Fed rate hikes this year, said it was "pretty much a done deal" that the tightening cycle would start in March.

"What matters over the coming days is going to be more about earnings," he added. "There’s still a bit of room for earnings to surprise to the upside."