Global Stocks Fall as Bond Yields Climb

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 1% in afternoon trading, following modest declines in Asia. Futures pointed to a 0.5% opening loss 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.

Minutes from the European Central Bank's June meeting released Thursday showed policy makers considered dropping a pledge to accelerate their massive bond-buying program. That followed the release of the Federal Reserve's meeting minutes on Wednesday, where officials signaled they may be ready to start slowly shrinking their large portfolio of bonds and other assets in the next few months.

"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.

German 10-year government bond yields rose to 0.563% on Thursday, around their highest since January 2016, from 0.469% Wednesday. Yields on 10-year Treasurys rose to 2.378% from 2.334%, while 30-year Japanese government bonds yields rose to 0.887%, around their highest since February. Higher yields mean falling prices.

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That came as Fed-fund futures tracked by CME Group showed investors were pricing in a greater chance of another U.S. interest rate rise this year than before the minutes were released, implying a roughly 65% probability of another rate rise by the end of the year.

The prospect of a stronger economy and higher rates could push investors out of the technology sector, the first half's best performer, and into areas such as banks that are cheaper and benefit more from a rising rate environment. Shares of technology companies have seesawed this week and were on track to lead declines Thursday after advancing in the previous session.

"People were hiding out in tech stocks, which were perceived as safer havens when the U.S. economy was going through a soft patch," said Mr. Schutte. At a wider level, however, while a hiccup in the bond market could ripple over into stocks in the short-term, if the economy continues to strengthen, there is a good chance equities will move higher too, he said.

The selloff in bonds Thursday came despite jitters around North Korea, which would typically boost demand for haven assets including Treasurys. President Donald Trump said he is considering "some pretty severe things" in response to North Korea's continued efforts to develop nuclear weapons that can reach the U.S.

In currencies, the WSJ Dollar Index, which tracks the dollar against a basket of 16 currencies, was flat, ahead of a reading on private sector employment on Thursday and Friday's monthly jobs report. The euro climbed 0.3% to $1.1382, weighing down local bourses.

Shares were lower across the board in Europe, but banks and insurance companies outperformed as they tend to benefit from higher government bond yields.

"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 marketplace anymore," he said.

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 fell 0.4% after 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%.

Wednesday's fall in oil prices dragged down shares of energy companies in Asia. Brent crude oil was last up 1.6% at $48.53 a barrel.

--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 08:43 ET (12:43 GMT)