GLOBAL MARKETS-U.S. bond yields hit 2-year high; emerging currencies slide

Mon Aug 19, 2013 1:36pm EDT

* Stimulus slowdown, economic recovery hit bonds, U.S.
benchmark yield at 2-year high
    * Indonesian rupiah lowest since 2009, Indian rupee hits
record low vs dollar
    * European shares down, Wall Street mixed
    * Fed meeting minutes this week could offer clues on policy

    By Steven C. Johnson
    NEW YORK, Aug 19 (Reuters) - U.S. benchmark bond yields hit
a two-year high near 3 percent 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, with large-cap tech shares lifting
the Nasdaq but interest-rate sensitive real estate stocks such
as shopping mall owner and developer Macerich slipping. 
    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. Political
uncertainty in Italy dragged down a broad European stock index.
    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 prospect
that has been making markets nervous for months. 
    The Fed has said it expects the economy to strengthen in the
second half of this year and into 2014, and recent U.S. data has
suggested labor market improvement and rising price pressure.
    That has pushed long-term interest rates up sharply over the
last few months, with the U.S. benchmark 10-year Treasury yield
 hitting a two-year high of 2.90 percent on Monday,
up more than a percentage point since May.
    However, Fed policymakers have also said that any sign of
weakness could delay the timetable for tapering bond purchases.
    "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 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."
    Rates on U.S. 30-year fixed-rate mortgages have followed
Treasury yields higher, which could threaten a housing market
recovery. That weighed on shares of real estate investment
trusts such as Macerich, which fell 1 percent on Monday. The
PLHX Housing Sector Index lost 1.7 percent.
    "Housing's been a bright spot and it's already been dulled a
bit because refinancing activity has slowed," said John Canavan,
a market strategist at Stone & McCarthy Research Associates. 
    But he said rates are still at "very low levels" and would
need to go much higher to cause serious trouble for housing.
    Capital-intensive industries such as miners and utilities,
however, could struggle in a higher interest rate environment.
    "Anybody with a large amount of short-term debt," said Kim
Forrest, senior equity research analyst at Fort Pitt Capital
Group. "And if they pay a dividend, it can be at risk."
    The Dow Jones industrial average was down 43.39
points, or 0.29 percent, at 15,038.08. The Standard & Poor's 500
Index was down 5.36 points, or 0.32 percent, at 1,650.47.
The Nasdaq Composite Index was up 6.55 points, or 0.18
percent, at 3,609.33. 
    German 10-year government bond yields rose 1.3
basis points to 1.89 percent, having earlier hit their highest
since March 2012 at 1.92 percent.
    
    EMERGING TURBULENCE
    European shares have held up better in recent weeks. 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.
    But a sharp slide in Italian stocks on Monday weighed on the
FTSEurofirst 300, which shed 0.6 percent. Uncertainty
about the strength of Italy's coalition government hurt shares.
    An index of global stocks fell 0.4 percent. 
  
    Rising interest rates are also hurting emerging markets that
have benefited from large cash inflows courtesy of the Fed's and
other central banks' loose monetary policies.
    The Indian rupee slid to a record low of 63.30 per dollar
, while the country's stock market lost 1.4
percent, extending a 4 percent drubbing sustained on Friday.
    "With the turnaround of developed markets, foreign
institutional investors have greater investment opportunities in
Western Europe and North America," said Sourindra Banerjee, a
professor at Warwick Business School in Britain. "This situation
is aggravated with the tapering of quantitative easing."
    India'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. 
    Indonesia's rupiah fell to a four-year low of 10,485 per
dollar and the strain also showed in MSCI's broadest
index of Asia-Pacific shares excluding Japan,
which fell 0.5 percent.
    Data later in the week will be an early reading on Chinese
manufacturing from HSBC. Recent data suggested the
economy is stabilizing, which should cheer Asian investors.
    Eventually higher U.S. yields should make the dollar more
attractive, though it has struggled of late on fear that Fed
tapering could drive investors out of U.S. fixed-income markets.
    The dollar was down about 0.1 percent at $1.3345 per euro
, little moved from Friday. Against the yen it rose 0.4
percent to 97.95.
    "We think over time the dollar will begin to outperform
against the major currencies, but at the moment it is being
offset by higher yields in Europe, where markets have been very
much focused on the improving cyclical momentum," said Lee
Hardman, a currency analyst at Bank of Tokyo-Mitsubishi.
    U.S. crude oil prices fell 57 cents to $106.89 a
barrel despite oil markets' focus on the violent unrest in
Egypt, which has stoked fears for exports from oil producers in
the Middle East and North Africa.  
    Copper slid 1 percent to $7,330 a ton after hitting a
10-week peak of $7,420 on Friday, while gold fell
0.9 percent to $1,375.79.
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