By Barbara Kollmeyer, MarketWatch , David Hodari
Bank stocks are on the upswing, apart from Danske Bank
European stock benchmarks retreated Thursday, tracking a global
equity pullback as a tumble in U.S. bond prices triggered global
losses for assets perceived as risky as yields climbed.
What are markets doing?
The Stoxx Europe 600 dropped 1.1% to close at 379.68, after
closing up 0.5% on Wednesday
(http://www.marketwatch.com/story/europe-stocks-rebound-amid-hopes-over-italy-eu-budget-resolution-2018-10-03).
The declined represented the sharpest one-day slide for the
benchmark since Aug. 15, according to Dow Jones Market Data.
Germany's DAX 30 slipped less severely than its peers, down 0.4%
to finish at 12,244.14, after reopening from a holiday on
Wednesday. Meanwhile, Greece's ASX Composite gained 1.4% to close
at 676.36.
France's CAC 40 tumbled by 1.5% to 5,410.85, marking its worst
day since Sept. 5, and the FTSE 100 index dropped 1.2% to 7,418.34,
representing its firmest daily fall since mid August.
Rising bond yields coincided with a pause in an uptrend for the
dollar
(http://www.marketwatch.com/story/dollar-rally-stalls-as-global-yields-move-higher-2018-10-04),
which left the euro up to $1.1499, compared with $1.1480 late
Wednesday. The pound traded at $1.2978, versus $1.2939 late
Wednesday.
What is driving the market?
The yield on 10-year Treasury note yield , a bellwether for risk
sentiment around the world, rose to 3.188% midday Thursday, from
3.159% late Wednesday, its highest level since July 2011. Global
yields followed suit. Bond prices fall as yields rise.
The yield on 10-year U.K. government debt, known as gilts, had
climbed to its highest level since before the country voted to
leave the European Union in 2016. Shares often follow government
bond rates up, as investors move from assets perceived as safe into
those viewed as riskier. A selloff in U.S. government bonds comes
as investors bet on healthy economic expansion domestically.
Meanwhile, rising rates also force investors in stocks to
reassess overall values because a low interest-rate regime has
compelled investors to pile into riskier assets, with market bears
warning that equity values have become elevated relative to
risk-free sovereign bonds, according to Sophie Huynh, cross-asset
strategist at Société Générale.
U.S. stocks traded lower, with the Dow Jones Industrial Average
retreating solidly from records
(http://www.marketwatch.com/story/dow-poised-to-retreat-from-records-after-five-day-rally-bond-yields-in-focus-2018-10-04),
while Asian markets also tumbled Thursday.
Read:Tariffs for the 1%: Fur coats, fancy handbags and other
luxury goods hit by trade war with China
(http://www.marketwatch.com/story/tariffs-for-the-1-fur-coats-fancy-handbags-and-other-luxury-goods-hit-by-trade-war-with-china-2018-10-04)
(http://www.marketwatch.com/story/tariffs-for-the-1-fur-coats-fancy-handbags-and-other-luxury-goods-hit-by-trade-war-with-china-2018-10-04)A
renewed focus on the U.S. administration's trade spat with China
was also putting some investors on edge.
What are strategists saying?
With the world's two largest economies having in recent months
imposed rounds of tariffs on the import of one another's goods,
"the market's now waiting to see whether we get that second round
of tariffs on Chinese goods that the Trump administration is
threatening," said Mihir Worah, CIO of asset allocation and real
return at Pimco. "I think we're likely to see an escalation, which
wouldn't be great for markets, although we may get a walk-back or a
deal later on."
"The rally in bond yields, if sustained, could have major
implications on financial markets going forward," Fawad Razaqzada,
technical analyst, Forex.com.
"It was during all those years post the financial crisis when
they were falling which led to investors flocking to the
higher-yielding stock markets in the first place. Now that bond
yields are rising, this is eroding the attractiveness of equities
on a relative basis. Thus, we could see funds flowing out of
equities, leading to a correction for major global indices," said
Razaqzada.
Stock movers
Among the top gainers were shares of BTG PLC (BTG.LN), which
rose more than 5% after the pharmaceutical company upgraded
guidance
(http://www.marketwatch.com/story/btg-upgrades-guidance-says-chairman-to-retire-2018-10-04-94851837)
and said Chairman Garry Watts plans to retire.
Rising bond yields were pushing investors toward banking stocks
on the theory that those institutions benefit as interest rates
rise. Commerbank AG (CBK.XE) up 3.5%, Credit Agricole SA (ACA.FR)
rose 2.2% and Deutsche Bank AG (DBK.XE) (DBK.XE) gained 1.5%.
Danske Bank AS (DANSKE.KO) sank 4.6% after a report that the
U.S. Justice Department will open a criminal investigation
(http://www.marketwatch.com/story/criminal-probe-of-danske-banks-russian-money-laundering-charge-now-includes-us-justice-department-2018-10-04)
into money-laundering allegations at the bank.
(END) Dow Jones Newswires
October 04, 2018 17:07 ET (21:07 GMT)
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