Global Stocks Fall as Bond Yields Climb -- Update

By Riva Gold Features Dow Jones Newswires

Stocks turned lower Thursday while German government bond yields climbed to their highest since early 2016 as investors bet central banks were edging closer to an exit from ultra-easy monetary policies.

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The Stoxx Europe 600 fell 0.8% late morning ahead of the release of the European Central Bank's June meeting minutes, following modest losses in Asia. Futures pointed to a 0.4% opening dip for the S&P 500 and steeper declines for the Nasdaq, on track to reverse Wednesday's gains.

Investors have focused on central bankers' cues in recent sessions as a strengthening economy has raised expectations that massive stimulus programs across the world could be nearing an end.

German 10-year bund yields rose to 0.535% on Thursday, around their highest since January 2016, from 0.469% Wednesday. Yields on 10-year Treasurys rose to 2.365% from 2.334% Wednesday, while 30-year Japanese government bonds yields rose to 0.88%, around their highest since February. Yields move inversely to prices.

"Central banks are all trying to extricate themselves from being the stock and bond markets' biggest supporter," said Brent Schutte, chief investment strategist at Northwestern Mutual Wealth Management. "I worry that as some of these central banks stop soaking up huge amounts of government bonds, you need more real buyers, who will demand real returns," he said.

A hiccup in the bond market could then ripple over into stocks in the short-term, but if the economy continues to strengthen, there is a good chance equities will move higher too, he said.

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Government bond yields starting moving higher again Wednesday following the release of the Federal Open Market Committee's June meeting minutes after European and Asian markets closed. The June FOMC minutes, combined with recent indications from officials, showed a growing likelihood that the central bank may be ready to start slowly shrinking its large portfolio of bonds and other assets in the next few months.

But the minutes were short on details and showed division between officials on the timing of that process, leaving investors with little conviction on how to interpret the bank's next move.

"Yesterday's FOMC minutes of the June meeting more or less confirmed the market's expectations," strategists at Commerzbank wrote in a note to clients. That still means the Fed's rate plans are considerably higher than the market's expectations for next year, they added.

Officials raised rates at their June meeting and penciled in one more increase this year, although only roughly 58% of investors expect rates to be higher by the end of the Fed's December meeting, according to Fed-fund futures tracked by CME Group.

The European Central Bank also publishes an account of its June meeting later Thursday, after ECB President Mario Draghi last week surprised the market with a speech interpreted by market participants as suggesting the bank may be ready to dial down its massive stimulus program sooner than expected.

"There is a near-unanimous view coming out of central banks for an unwinding of this unconventional policy, either through interest rate rises or pulling back on quantitative easing, or in the United States, selling down some of the central bank holdings," said Paul Flood, multiasset portfolio manager at Newton Investment Management. "People have finally woken up to the fact there's not a backstop, a forced buyer in the market place anymore," he said.

In European stocks Thursday, car companies led advances as they rebounded from a drop on Wednesday, while banks and insurance companies outperformed as they tend to benefit from higher government bond yields. Stocks elsewhere were mostly lower, with Reckitt Benckiser Group PLC down over 2% after it said it expects to lose revenue following last week's cyberattack.

Earlier, most Asian stock indexes traded in narrow ranges and stuck close to Wednesday's closing levels, following a muted lead from Wall Street.

In Tokyo, the Nikkei Stock Average was down 0.4% as the yen strengthened against the dollar, pressuring the export-heavy index. Hong Kong's Hang Seng Index eased 0.2% even as index heavyweight Tencent inched higher, while the Shanghai Composite Index added 0.2%.

Crude oil prices cast a cloud over Asian stock markets as they fell sharply Wednesday after regional markets closed, pressuring oil companies in Japan and China. Brent crude oil was last up 1.3% at $48.43 a barrel.

The WSJ Dollar Index, which tracks the dollar against a basket of 16 currencies, was flat.

Ese Erheriene, Ian Walker and Kosaku Narioka contributed to this article.

Write to Riva Gold at riva.gold@wsj.com

(END) Dow Jones Newswires

July 06, 2017 06:44 ET (10:44 GMT)