Shares dogged by weak oil; Treasury yield curve flattens

NEW YORK (Reuters) - Declines in financial and energy shares sent U.S. and European equity markets lower on Wednesday, weighed down in part by U.S. crude prices at 10-month lows, while the U.S. Treasury yield curve hit its flattest in nearly a decade.

Traders work on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., May 31, 2017. REUTERS/Brendan McDermid

The U.S. S&P 500 financial sector .SPSY closed down 0.8 percent while the European Stoxx Europe 600 Financial Services index .SXFP closed down 1.3 percent.

The financial sector fell as the U.S. Treasury yield curve held near 10-year lows, with European financials were punished by heavy losses from British subprime lender Provident Financial Plc PFG.L.

Flattening in the yield curve, or the narrowing in the difference between short- and long-term yields, can weigh on banks’ profitability.

A drop in U.S. crude prices to a 10-month low of $42.05 per barrel and a decline in benchmark Brent crude to a seven-month low of $44.35 per barrel pressured energy shares on nagging fears about global oversupply.

The U.S. Nasdaq Composite bucked the trend of weaker equity indexes, rising on gains in biotechnology stocks.

“Because people are seeing oil lower as another harbinger of lower inflation, a lot of other cyclicals (besides energy stocks) aren’t doing well,” said Chris Zaccarelli, chief investment officer at Cornerstone Financial Partners in Huntersville, North Carolina.

The price of oil has dropped more than 20 percent so far this year, its weakest performance in the first six months since 1997.

Brent crude LCOc1 settled down $1.20, or 2.61 percent, at $44.82 per barrel. U.S. crude CLc1 settled down 98 cents, or 2.25 percent, at $42.53 per barrel.

MSCI's all-country world equity index .MIWD00000PUS, which tracks shares in 45 nations, was last down 0.66 points, or 0.14 percent, at 465.63.

The Dow Jones Industrial Average .DJI closed down 57.11 points, or 0.27 percent, at 21,410.03. The S&P 500 .SPX closed down 1.42 points, or 0.06 percent, at 2,435.61. The Nasdaq Composite .IXIC ended up 45.92 points, or 0.74 percent, at 6,233.95.

Europe's broad FTSEurofirst 300 index .FTEU3 closed down 0.23 percent at 1,527.15.

The yield curve between five-year notes and 30-year bonds US5US30=TWEB flattened to 95.2 basis points, the narrowest since December 2007, as investors evaluated hawkish Federal Reserve policy and deteriorating inflation measures.

Five-year note yields US5YT=RR, which are highly sensitive to rate policy, rose to a four-week high of 1.80 percent on Tuesday.

Thirty-year bond yields US30YT=RR, which are largely driven by future expectations of growth and inflation, meanwhile dropped to 2.72 percent on Wednesday, the lowest since Nov. 9.

“I think the market may be pricing in a little higher odds of another rate hike before the end of the year, and that is helping drive some of the flattening,” said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.

The dollar index .DXY, which measures the greenback against a basket of six major rivals, was last down 0.2 percent at 97.573. That put it below a one-month high of 97.871 reached on Tuesday.

Gold prices rose after sliding to a five-week low in the previous session. U.S. gold futures GCcv1 settled up 0.2 percent at $1,245.80.

Additional reporting by Marc Jones and Sujata Rao in London and Karen Brettell and Richard Leong in New York; Editing by Meredith Mazzilli and Bernadette Baum