Government bonds continue to fall out of favour with investors, sending yields higher. Will US 10-Year Treasuries yielding 3% bring about an immediate collapse in equity markets? The answer from today was an unequivocal no. The tone across markets was cautious, but nothing akin to the drop in February when Treasury yields rose above 2.9%.
Shorter-dated treasury yields have been rising in anticipation of further rate rises from the Fed and the end of stimulus from other central banks. Rising inflation expectations in the US are seeing longer-dated yields follow suit. That’s a good thing. Yields on longer-dated actually need to rise to keep the yield curve from inverting to avoid a recession.
European equities were on the back foot despite stronger earnings after survey results showed German business sentiment soured again in April. Bank shares fell led by declines in Banco Santander (MC:SAN) despite reporting profit rising 10%. Shares of Banco de Sabadell (OTC:BNDSY) were not helped by a disastrous software upgrade at TSB bank, which the Spanish bank bought three years ago.
Strength in the oil and gas sector and more M&A speculation on Shire (LON:SHP) helped the FTSE 100 nudge up. Oil prices at three-year highs and another rise in quarterly earnings expected from oil majors saw shares of BP (LON:BP) and RDS outperform. It could be third time lucky for Takeda (T:4502). Shire looks tempted as it publicly considers the offer. We tend to think management has already shown its hand by selling the oncology unit, and the result will be another ‘thanks but no thanks’.
Wall Street was focused on reports from US industrial giants including Caterpillar (NYSE:CAT), 3M (NYSE:MMM), United Technologies (NYSE:UTX) and Lockheed Martin (NYSE:LMT). A strong global economy means demand is strong but a rise in input cost inflation and the risk of a trade war are difficulties that require careful navigation.
The widening gap between the yields on US government bond to equivalents in Europe and Japan saw the dollar extend its break higher. USDJPY reached a 2-month high over 109.
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