Bond yields fall as Greece default hurts stocks
BOND yields and the dollar fell on Thursday after the Federal Reserve signalled that U.S. interest rates would rise more slowly than markets had expected, while Greece’s drift closer to default pushed European stocks lower.
Euro zone finance ministers meet later in the day, but expectations are low that Greece and its international creditors will reach a deal to prevent the cash-strapped country from defaulting at the end of the month.
Earlier in Europe, Norway’s central bank became the 29th monetary authority to ease policy this year by cutting interest rates to a record low, and sterling hit a seven-year high after UK retail sales boosted expectations UK rates might soon rise.
The main drivers for European markets, however, will be the news out of the Eurogroup finance ministers meeting in Luxembourg and the outlook for U.S. monetary policy.
“Markets are starting to sit up and pay attention to the fact that a resolution will not be forthcoming anytime soon for Greece,” said Brenda Kelly, head analyst at London Capital Group.
European stock markets were all lower. The FTSEuroFirst 300 index of leading European shares was down 0.5 percent at 1,514 points .FTEU3, Germany’s DAX .GDAXI down 0.4 percent at 10,934 points, France’s CAC .FCHI down 0.6 percent at 4,762 points and Britain’s FTSE 100 .FTSE down just 0.1 percent at 6,675 points.
Greece’s benchmark stock index hit a three-year low of 651 points .ATG, and has lost almost 20 percent in the last week. “With Greece, no news is bad news at this stage,” said Holger Schmieding, chief economist at Berenberg Bank in London.
Overnight in Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan .MIAPJ0000PUS inched up 0.1 percent, while Japan’s Nikkei .N225 skidded 0.8 percent to a one-week low as the yen gained against the dollar. Wall Street was called to open flat on Thursday SPc1. The Dow .DJI and S&P .SPX added 0.2 percent on Wednesday after the Fed’s statement and comments from Fed chair Janet Yellen.
The twin forces of the Fed and Greek uncertainty kept a lid on global bond yields. On Wednesday, the Fed said that the economy was probably strong enough to support a rate increase this year. But it lowered its forecasts for 2015 growth and reduced its federal funds rate forecast. The 10-year U.S. Treasury yield, which hit an eight-month high last week, fell as low as 2.26 percent, a two-week low.
The 2-year yield also hit a two-week low at 0.63 percent, marking a post-Fed decline of as much as 10 basis points. The Fed’s stance tripped up some investors, who had expected the central bank to signal a rate hike as early as September. Goldman Sachs pushed back its forecast for the first increase to December from September.
“We had viewed a clear signal for a September hike at the June meeting as close to a necessary condition for the FOMC to actually hike in September, but the committee did not lay that groundwork,” chief U.S. economist Jan Hatzius wrote in a note. The decline in U.S. yields put the dollar under pressure, sending the greenback down 0.6 percent against the yen to 122.65 yen.
That offset the Greek effect on the euro, and the single currency rose 0.5 percent to $1.1395. Earlier it rose above $1.14 for the first time in a month.
Sterling hit a seven-year high on a trade-weighted basis, lifted by UK retail sales figures that bolstered expectations the Bank of England might soon raise rates. In European bond markets, Germany’s 10-year yield fell 6 basis points to 0.75 percent. Last week, it was as high as 1.06 percent. Other countries’ yields also fell, and investors demanded a bigger premium for holding the bonds of countries such as Spain over safe-haven Germany.
The 10-year Spanish/German spread widened as much as 8 basis points to 158 basis points before settling back to unchanged on the day. In commodities, oil jumped on the back of the weaker dollar. Brent crude LCOc1 rose 1.3 percent to $64.67 a barrel and U.S. crude CLc1 rose 1.1 percent to $60.60. Spot gold also got a boost from the weaker dollar and lower U.S. interest rate environment, rising $11 to $1,195 an ounce.
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