GLOBAL MARKETS-Bond yields rise, stocks sink on Fed speculation

Fri May 31, 2013 5:30pm EDT

* Treasuries prices fall further after Midwest factory
report
    * Dollar climbs off three-week low
    * Wall Street falls amid speculation about Fed's stimulus
program


    By Herbert Lash
    NEW YORK, May 31 (Reuters) - U.S. stocks sold off and
government bond yields rose on Friday after improved factory
activity in the U.S. Midwest and rising consumer sentiment
increased anxiety about the Federal Reserve's next move. 
    U.S. Treasury debt prices ended their worst month in nearly
2-1/2 years. On Friday, bond yields retested their highest
levels in more than 13 months, set two days earlier, even though
data signaled inflation remained low because of sluggish growth.
    Global equity markets fell amid volatile trading on concerns
that the Fed may ease its stimulus program, a driver of a strong
rally in U.S. stocks and equities elsewhere in the world.
    A slide on Wall Street accelerated at day's end, driving the
Dow industrials down more than 200 points. The three major U.S.
stock indexes fell more than 1 percent amid a rebalancing of the
MSCI stock indexes. 
    "As you sensed the weakening market with drifting lower
underlying bids, I think sellers started to get a little
nervous, and you started to see different areas of the market
coming a little more unglued," said Michael James, managing
director of equity trading at Wedbush Securities, in Los
Angeles.
    The S&P 500 posted consecutive weekly losses for the first
time since November as investors took some money off the table
after a rally that has pushed the benchmark index up 14.3
percent - the best first five months of a year since 1997.
    The S&P 500 ended May up 2.1 percent, its seventh straight
month of gains and its longest streak of monthly gains since
2009. 
    "Traders were going into the end of month long, and traders
were going to be sellers at the end of the day, regardless,"
James said.
    The Dow Jones industrial average slid 208.96 points,
or 1.36 percent, to close at 15,115.57. The Standard & Poor's
500 Index dropped 23.67 points, or 1.43 percent, to
finish at 1,630.74. The Nasdaq Composite Index fell
35.38 points, or 1.01 percent, to end at 3,455.91.     
    The dollar advanced after data showed Midwestern factory
activity regaining speed, but U.S. consumer spending fell in
April for the first time in almost a year and already low
inflation declined further.
    While the factory data added fuel to growing speculation
that the Fed may begin to taper asset purchases, the U.S.
central bank's favorite gauge of inflation showed price
increases well under its target rate, making a pullback less
likely any time soon.
    U.S. and German government debt prices reversed course and
fell after the Institute for Supply Management-Chicago business
barometer jumped to 58.7 from 49 in April, handily beating
economists' expectations for a reading of 50. 
    The dollar rose against several key currencies and posted
its eighth straight month of gains against the yen.
    Investors and traders are grappling with whether the Fed,
looking at a stronger economy, will choose to end its
bond-buying program as stocks and housing prices surge.
    "If you get the hint or the idea that they're going to start
to trim purchases, then this is the volatility that's going to
be created around it," said Sean Murphy, a Treasuries trader at
Societe Generale in New York.
    A Thomson Reuters/University of Michigan survey that showed
greater optimism over the economic outlook and personal finances
pushed U.S. consumer sentiment to its highest level in nearly
six years in May - and initially helped stocks.
    A measure of global equities, MSCI's all-country world
equity index, fell 1.18 percent.
    The bond market recovered in a late surge of buying, pushing
the price of the 30-year bond slightly higher for the day.
    The benchmark 10-year U.S. Treasury note fell
3/32 in price to yield 2.13 percent, after the yield earlier
traded as low as 2.066 percent.
    German Bund futures also retreated in rocky trade
to end the session almost flat, down 2 ticks at 143.71.
    In Europe, the FTSEurofirst 300 index leading
regional shares finished 0.92 percent lower at 1,216.17. 
    The index rose 1.6 percent in May to record the best monthly
winning streak in its 16-year history.
    The euro fell to a session low of $1.2945 and was
last at $1.2994, down 0.41 percent for the day.
    The dollar rose 0.33 percent to 100.39 yen.
    U.S. oil prices fell below $93 a barrel, extending losses
after weak consumer spending data. Members of the Organization
of Petroleum Exporting Countries agreed to leave their output
target unchanged, as expected, with little impact on markets as
a result.
    Brent oil fell $1.80 to settle at $100.39 a barrel.
For the month of May, Brent crude slid 1.9 percent. U.S. crude
oil dropped $1.64 to settle at $91.97 a barrel. For the
month of May, U.S. crude declined 1.6 percent.