Stocks hurt by U.S. 10-year yield’s climb back near 5%, earnings misses

LONDON, Oct 26 (Reuters) – U.S. Treasury yields were back near 5% on Thursday, reinforced by above-expectation U.S. GDP data, dragging shares around the world to multi-month lows in the middle of a busy corporate earnings week.

The U.S. economy grew at its fastest pace in nearly two years in the third quarter, Thursday data showed, as higher wages in a tight labour market helped to power consumer spending, again defying dire warnings of a recession that have lingered since 2022.

The unexpected strength of the economy has been a factor in the sell off in the U.S. Treasury market, and the benchmark 10-year yield last stood at 4.9381%, down a whisker on the day, having earlier reached 4.989% challenging the 5.021% – the highest since 2007 – hit earlier in the week.

A rebound in U.S. home sales and an auction of five-year notes that showed weak demand were the latest trigger for concern in the bond market, which saw the U.S. 10-year Treasury yield rise 11 basis points on Wednesday.

“The Treasury market is clearly very much top of mind, the big back-up in yields yesterday appeared to have quite a negative impact on equities as well, so how that evolves and how it reacts to data we have this week will be the big swing factor for global markets,” said Kiran Ganesh, global head of investment communications at UBS Wealth Management.

Friday’s personal consumption expenditure (PCE) price index, which is the Fed’s preferred inflation gauge, is also in focus.

In the mix for investors on Thursday, the European Central Bank broke the longest streak of interest rate hikes in its 25-year history, leaving its main rate at a record high of 4.0%, and saying the latest data continued to point to inflation slowly coming down to its 2% target.

There was limited market reaction to the decision, and the euro was down 0.25% on the day at $1.0541, largely where it was before the decision, as eyes turn to President Christine Lagarde’s post decision press conference.

EARNINGS FOCUS

Europe’s broad STOXX index was down 0.4%, just off seven-month lows hit earlier in the week, (.STOXX) and MSCI’s broadest index of Asia-Pacific shares outside Japan (.MIAPJ0000PUS) hit an 11-month low.

U.S. Nasdaq futures were down 0.5% and S&P 500 futures were off 0.36%, even after all three main U.S. benchmarks had closed Wednesday sharply lower.

Ganesh said there were three main things pushing stocks lower.

“High yields are reflecting concerns that rates will have to stay high for longer, and that won’t be good for the economy longer term; high yields are also competing for equity market investment; and the start of the earnings season has been a mixed bag, but generally on the negative side.”

European banks were the big earnings story on Wednesday, with Standard Chartered (STAN.L) at one point falling more than 17%, while BNP Paribas (BNPP.PA) fell 3.3% and Swedbank (SWEDa.ST) 6.7% all after results.

The broader European banking index (.SX7P) fell as much as 2.4% to its lowest in four months, with Spain the only positive.

U.S. tech stocks have also been reporting. Alphabet’s (GOOGL.O) shares logged their worst session since March 2020 overnight, dropping 9.5% as investors were disappointed with growth stalling in its cloud division.

Meta Platforms (META.O) also dropped in premarket trading, even after its third-quarter results beat expectations, with the Facebook parent forecasting 2024 spending above estimates and suggesting the conflict in Israel and Gaza could dampen fourth-quarter sales.

Amazon.com reports its results after the closing bell Thursday.

In currency markets, the dollar index hit a two-week high of 106.88, driven by the higher yields, and the yen weakened past 150 per dollar, a level that has put traders on guard for intervention to support the Japanese currency, and to a 10-month low of 150.78 per dollar.

Oil prices slipped after a rise in U.S. crude stockpiles and due to the stronger dollar, though the war in the Middle East loomed large in traders’ minds. U.S. crude dipped 2.2% to $83.14 a barrel. Brent crude fell 2.2% to $88.16 per barrel.

Spot gold was flat, at around $1,977.5 an ounce.

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