European stock benchmarks retreated on Thursday, tracking a global equity pullback as a tumble in U.S. bond prices triggered losses for perceived riskier assets around the globe as yields rose.
What are markets doing?
The Stoxx Europe 600
SXXP, -1.08%
dropped 0.7% to 380.82, after closing up 0.5% on Wednesday.
Bucking losses across the board, Germany’s DAX 30
DAX, -0.35%
slipped less severely than its peers, down 0.2% to 12,258.08, after reopening from a holiday on Wednesday. Meanwhile, Greece’s ASX Composite
GD, +1.43%
gained 1.2% to 674.95.
France’s CAC 40
PX1, -1.47%
slid 1.2% to 5,424.67 and the FTSE 100 index
UKX, -1.22%
dropped 1% to 7,433.03.
Rising bond yields coincided with a pause in an uptrend for the dollar, which left the euro
EURUSD, +0.0087%
up to $1.1499, compared with $1.1480 late Wednesday. The pound
GBPUSD, +0.0154%
traded at $1.2978, versus $1.2939 late Wednesday.
What is driving the market?
The yield on 10-year Treasury note yield
TMUBMUSD10Y, +0.01%
a bellwether for risk sentiment around the world, rose to 3.188% 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
DJIA, -0.75%
retreating from records, 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
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, +5.09%
which rose more than 5% after the pharmaceutical company upgraded guidance 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, +3.70%
up 3.8%, Credit Agricole SA
ACA, +2.19%
rose 2.3% and Deutsche Bank AG
DBK, +0.73%
DB, -1.06%
up over 2%.
Danske Bank AS
DANSKE, -4.60%
sank 3.6% after a report that Justice Department will open a criminal investigation into a money-laundering allegations at the bank.
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Source : MTV