US stocks set for cautious open as bond yields surge to pre-pandemic highs, while UK inflation soars to a 30-year high

Traders work on the floor of the New York Stock Exchange (NYSE)

US stocks wavered cautiously Wednesday after surging bond yields triggered a sell-off on Wall Street.
The 10-year US Treasury yield last traded at 1.89%, its highest in two years. 
Inflation in the UK surged to a 30-year high of 5.4% in December, up from November’s 5.1%. 
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US stocks trod water Wednesday, while rising US Treasury yields created a challenging backdrop for bond investors as markets positioned for a swifter pace of monetary policy tightening by the Federal Reserve.

Futures on the Dow Jones lost 0.1% as of 4:15 a.m. ET, while those on the S&P 500 fell 0.08%, and the Nasdaq fell 0.04%, suggesting a cautious start to trading later in the day.

The 10-year Treasury yield rose 3 basis points to 1.897% on Wednesday, while two-year Treasury yields rose 2 basis points to 1.067%, holding near two-year highs. The 10-year has climbed above 1.8% for the first time since COVID-19 began to impact markets in early 2020.

UBS predicts 10-year yields will climb modestly higher to around 2% by June, and to 2.1% by the end of the year, as investors trim their expectations for more aggressive near-term rate rises, which could see a slower rise in 2-year yields – known as a “steepening” of the yield curve.

“The 2-year Treasury, meanwhile, has moved too aggressively in pricing in Fed tightening, in our view, and we expect the yield curve to steepen,” said Mark Haefele, chief investment officer at UBS Global Wealth Management. “This steepening should further improve the positive backdrop for financial services companies.”

Market participants are positioned for a more hawkish Federal Reserve meeting next week. Most assume there will be a first interest rate increase, in an effort to cool surging inflation, according to Jens Magnusson, chief economist at SEB Research.

Rising yields have been undermining growth stocks, such as tech, which typically suffer most from higher borrowing costs, since the present value of future profits declines as rates rise. Overall, the tech sector fell 2.6% on Tuesday.

The latest sell-off was accentuated after disappointing fourth-quarter results from Goldman Sachs, which posted lower-than-expected earnings due to weaker trading activity.

Elsewhere in Europe, UK inflation soared to a 30-year high of 5.4% in December. That’s up from November’s 5.1% reading and its highest since March 1992.

“These are dreadful figures, higher than forecasts and will undoubtedly increase pressure on the Bank of England’s Monetary Policy Committee to raise interest rates at their next meeting,” said Sandra Holdsworth, head of rates at Aegon Asset Management.

The UK central bank will next meet on February 3. Analysts say that with supply chains still in crisis and economists warning that inflation may not peak until spring, multiple interest rate rises may be necessary in the year ahead.

London’s FTSE 100 was about flat, while the Euro Stoxx 600 and Frankfurt’s DAX fell 0.1%.

Asian indices mostly lost ground after the sell-off on Wall Street. The Shanghai Composite fell 0.3% and Tokyo’s Nikkei lost 2.8%. Hong Kong’s Hang Seng rose slightly by 0.06%.

Oil prices are trading at seven-year highs, with growing geopolitical tensions in the Middle East being one reason for the latest upswing. Brent crude futures rose 0.3% to $87.81 a barrel and West Texas Intermediate rose 0.5% to $85.28 a barrel.

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