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NEW YORK (Reuters) - Global equity markets swooned and bond prices slid on Thursday after slowly improving U.S. jobs data and rising consumer prices added to speculation the Federal Reserve will soon begin to trim its considerable support of the economy and asset prices.
The number of Americans filing new claims for jobless benefits fell to an almost six-year low last week, while rising consumer prices indicated that a downward potential capable of destabilizing a sluggish economy had abated.
The three major U.S. stock indexes posted their biggest percentage decline in almost two months, falling 1.4 percent or more. U.S. Treasuries yields rose to their highest level in two years, with the benchmark 10-year note topping 2.8 percent for the first time since August 2011.
A major pan-European stock index slid more than 1 percent, as did a measure of global equity markets, before it pared some losses. Britain's benchmark FTSE 100 index .FTSE fell 1.6 percent, though other regional country indexes in Europe posted smaller declines.
"It's a set of data that will add to the September tapering conversation," Tom Porcelli, chief U.S. economist at RBC Capital Markets in New York, said of the prospect for the Fed beginning to reduce its bond purchases.
"The bottom line is that the tapering will probably happen either in September or October, but it will be a gradual one."
The Fed's next policy meeting will be held on September 17-18, when a decision could be forthcoming about the central bank's monthly purchase of $85 billion in bonds.
Talk about the timing of an end to the Fed's bond buying has dominated markets, as it is likely to boost U.S. Treasury yields and support demand for the dollar. A reduction in stimulus could also hurt shares and commodities, which have gained as world central banks have primed markets with liquidity.
The Dow Jones industrial average .DJI closed down 225.47 points, or 1.47 percent, at 15,112.19. The Standard & Poor's 500 Index .SPX fell 24.07 points, or 1.43 percent, at 1,661.32. The Nasdaq Composite Index .IXIC slid 63.16 points, or 1.72 percent, to 3,606.12.
Declining shares outpaced advancing ones by almost 6 to 1 on the New York Stock Exchange and by more than 4 to 1 on Nasdaq.
MSCI's all-country world index .MIWD00000PUS fell 0.9 percent, while the FTSEurofirst 300 .FTEU3 of leading European shares fell 1.01 percent to close at 1,227.79.
Financial markets have largely positioned for the Fed to start paring its bond buying in September. But conflicting signals from policymakers and muted inflation data had combined lately to undermine this conviction.
On Wednesday, St. Louis Fed President James Bullard cited the inflation outlook when he said he had not decided whether next month's policy meeting would be too soon to curb the asset purchases, known as quantitative easing.
"The data continues to improve and impress the marketplace, and I think the data will continue in this direction," said Charles Comiskey, head of Treasuries trading at Bank of Nova Scotia in New York. "Then the question becomes not whether they are going to taper in September, but how much they will taper."
Corporate news pointed to a still-sluggish American economy.
Wal-Mart Stores Inc. (WMT.N) cut its revenue and profit forecasts for the year as U.S. shoppers were pinched by higher payroll taxes and pricier gasoline. Wal-Mart shares fell 2.6 percent to $74.41.
Cisco Systems (CSCO.O) said on Wednesday it will shed 4,000 jobs, or 5 percent of its work force, to reduce costs. Its shares dropped 7.2 percent to $24.485 as a slew of brokerages cut their price targets on the stock.
An improved economic outlook for the euro zone prompted investors to dump safe-haven German Bunds, pushing yields to their highest since March 2012.
Data on Wednesday confirmed the euro zone emerged from a long recession in the second quarter, and business surveys earlier in the week raised expectations the recovery might gather pace in the second half of the year.
On Thursday, 10-year German Bund yields rose as high as 1.906 percent, while the 10-year U.S. Treasury note was down 15/32 in price to yield 2.7645 percent after earlier yielding as much as 2.823 percent.
The dollar climbed to a near two-week high against the euro and a more than one-week high against the yen, before the greenback retreated.
The euro was last up 0.73 percent at $1.3352, while the dollar fell 0.96 percent to 97.19 yen.
Gold rose to a near two-month high as a weaker dollar triggered short-covering and a technical breakout once prices breached key resistance at $1,350 an ounce.
Spot gold was up 2.3 percent at $1,365.60 an ounce. U.S. Comex gold futures for December settled up $27.50 at $1,360.90 an ounce.
Brent oil prices climbed above $111 per barrel to a four-month high on fears that escalating violence in Egypt could affect the Suez Canal or spread in the Middle East, where some supplies are already disrupted.
Front-month September Brent, which expires on Thursday, rose 91 cents to settle at $111.11 a barrel after earlier jumping to $111.53, its highest level since April 2. U.S. oil settled 48 cents higher at $107.33.
"Disruptions at the Suez Canal are unlikely, but markets never move on what's likely. They move on fear. If people are fearful about supply, they buy even if the market is fundamentally well supplied," said Michael Hewson, an analyst at CMC Markets.
Economic growth since 2008: link.reuters.com/nyj42v
U.S. inflation and rates: link.reuters.com/gex47s
Reporting by Herbert Lash; Additional reporting by Richarch Hubbard in London; Editing by Nick Zieminski, W Simon, Leslie Adler and Dan Grebler