While you were sleeping: Bond yields pressure stocks

Wednesday 13th May 2015

Wall Street traded lower, even as it erased some of its earlier losses, as rising global bond yields tempered the appetite for equities trading near record highs.

Euro zone bonds have led the global climb in yields, rising from record lows in recent weeks as investors began questioning their optimism about a quantitative easing program launched by the European Central Bank in March.

Yields on Germany’s 10 year bund rose six basis points to 0.67 percent. That compares with a record low of 0.049 percent set on April 17, according to Bloomberg. After losing ground early in the session, US Treasuries rallied and that helped the US Treasury record a successful sale of US$24 billion of three year notes.

Recent data including on US jobs, consumer sentiment, and GDP have shown that the US economy is recovering from first quarter weakness, though likely not at a pace that will compel the Federal Reserve to raise interest rates soon.

"In the short term, the market is a hostage to interest rates," Jim Awad, managing director at Plimsoll Mark Capital, told Reuters. "To the extent you have an increase in interest rates that the Fed doesn't control, you're getting an unwanted tightening in the financial markets."

In late trading in New York, the Dow Jones Industrial Average inched 0.06 percent lower, while the Standard & Poor’s 500 Index fell 0.09 percent, and the Nasdaq Composite Index slipped 0.08 percent.

Last trading at 18,088.57, the Dow is not far off its record high 18,288.63 reached earlier this year, while the S&P 500 is close too.

“When you have stocks at the high end of the historical range you need better news than what we have,” Matt Maley, an equity strategist at Miller Tabak & Co in Newton, Massachusetts, told Bloomberg. “This rise in rates isn’t coming from a better economy or a fundamental reason.”

In the Dow, slides in shares of Intel and those of Merck, last down 1.2 percent and 0.9 percent respectively, offset gains in shares of Wal-Mart and those of Walt Disney, last up 1.1 percent and 0.9 percent respectively.

In the latest economic data, the National Federation of Independent Business said its small business optimism index rose 1.7 points to 96.9 in April, the biggest advance since December.

In a fresh corporate deal, shares of AOL jumped, last 18.4 percent higher, after Verizon Communications said it agreed to buy the company in a deal worth US$4.4 billion. Shares of Verizon last traded 0.5 percent lower.

"There’s the question of whether there is truly an advantage in owning all of this themselves," Craig Moffett of media research firm MoffettNathanson, told Reuters. "They are getting a hodgepodge of ancillary assets that may be as much a distraction as a benefit."

In Europe, the Stoxx 600 Index finished the session with a 1.3 percent drop from the previous close.

France’s CAC 40 Index fell 1.1 percent, the UK’s FTSE 100 Index dropped 1.4 percent, while Germany’s DAX slid 1.7 percent. Greece’s ASE Index rose 1.4 percent.

BusinessDesk.co.nz

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