GLOBAL MARKETS-U.S. bond yields hit 2-year high, emerging currencies slump
* Stimulus slowdown, economic recovery hit bonds, U.S. benchmark yield at 2-year high * Indonesian rupiah lowest since 2009, Indian rupee slides * European shares down, Wall Street indexes up slightly * Fed meeting minutes this week could offer clues on policy By Steven C. Johnson NEW YORK, Aug 19 (Reuters) - U.S. bond yields hit a two-year high on Monday and emerging market currencies from India to Indonesia tumbled as markets braced for the Federal Reserve to start withdrawing support for the U.S. economy. U.S. stocks were mixed as trading began but then edge higher, while European shares slipped. Fear that the Fed will scale back stimulus spending next month battered Wall Street last week, with the Dow industrials putting in their worst weekly run of the year. Minutes from the Fed's last policy meeting will be released on Wednesday and could shed light on when the central bank plans to slow its $85 billion-a-month in bond purchases, a tricky process that has been making markets nervous for months. The Fed has said it expects the economy to improve in the second half of this year and in 2014, and recent signs of firmer growth have bolstered expectations that it will start winding down stimulus. However, policymakers have also stressed that any sign of weakness could delay the timetable for tapering purchases. Those expectations have helped push up long-term interest rates, with the U.S. benchmark 10-year Treasury hitting a two-year high of 2.87 percent on Monday, up more than a percentage point since May. German 10-year government bond yields rose 1.3 basis points to 1.89 percent, having hit their highest since March 2012 at 1.924 percent at the open. "What you are seeing at the moment in a way is central bankers versus the markets," said ABN Amro economist Nick Kounis. "The markets are pushing up the rate (increase) expectations and central bankers have been trying to pour cold water on the moves, but it is proving more difficult against a background of stronger economic data." The Dow Jones industrial average was up 6.84 points, or 0.05 percent, at 15,088.31. The Standard & Poor's 500 Index was up 1.70 points, or 0.10 percent, at 1,657.53. The Nasdaq Composite Index was up 17.61 points, or 0.49 percent, at 3,620.39. While the notion of less Fed support has rattled Wall Street in recent weeks, European shares have held up fairly well. The 17-country euro zone ended an 18-month recession last quarter, growing 0.3 percent, and August business surveys this week are likely to show the modest recovery is slowly broadening out. Major European indexes were down slightly on Monday, pushing the FTSEurofirst 300 down 0.6 percent. An index of global stocks slipped 0.3 percent. EMERGING TURBULENCE As rising core debt yields make it harder for developing nations to fund widening current account deficits, emerging markets - whose economies are heavily linked to U.S. fortunes and the dollar - took a spill. The Indian rupee slid as far as 62.73 per dollar, emphatically breaching the previous low of 62.03. The country's share market lost 1.4 percent, on top of a 4 percent drubbing on Friday. The country's central bank has tried to restrict how much money Indian residents and companies can send offshore, but that only raised fears of outright capital controls that would further undermine the confidence of foreign investors. "The foreign investor community wants tangible and ambitious reforms that look and feel like a worthy 'second generation' to the fundamental measures adopted in the early 1990s," Westpac analysts said in a note. Indonesia's rupiah shed 1 percent to four-year lows at 10,485 per dollar and the strain also showed in MSCI's broadest index of Asia-Pacific shares outside Japan , which fell 0.5 percent. Crucial data later in the week will be an early reading on Chinese manufacturing from HSBC. Recent data suggested the economy might be stabilizing and any improvement in the purchasing manager index will be welcomed by Asian investors. DOLLAR DIVERGENCE In the currency market, the dollar gave up early, modest gains to stand at $1.3355 per euro, little moved from Friday. Against the yen it pulled up to 97.95. The dollar has been in gradual decline for the past few weeks, in part on concerns that the prospect of Fed tapering would scare foreign investors out of U.S. bonds. At some point yields should reach levels that are attractive to investors. But Lee Hardman, a currency analyst at Bank of Tokyo-Mitsubishi, said for now the view on the currency was split between advanced and more vulnerable emerging economies. "The rising U.S. yields are making the global financing conditions more difficult, especially for countries which have elevated current account deficits," he said. "We think gradually over time the dollar will begin to outperform against the major currencies, but at the moment it is being offset by higher (bond) yields in Europe, where markets have been very much focused on the improving cyclical momentum." Hopes for a pick-up in growth globally have also supported commodities. Copper slid 0.7 percent to $7,359 a tonne after hitting a 10-week peak of $7,420 on Friday, while gold and platinum both edged down from two-month highs. Brent crude inched up toward $111 a barrel as oil markets remained focused on the violent unrest in Egypt, which has stoked fears for exports from oil producers in the Middle East and North Africa.
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