NEW YORK (Reuters) - World stock markets broadly fell and government debt yields rose on Tuesday as traders perceived tighter U.S. monetary policy than forecast this year after remarks by the new Federal Reserve chief in testimony before the U.S. Congress.
Fed Chairman Jerome Powell pledged to balance the risk of an overheating economy and the need to keep growth on track in his prepared testimony. But Powell’s remark that inflation has strengthened since December sent yields higher and stocks lower.
The yield on the 10-year U.S. Treasury, the global benchmark for commercial lending, jumped past 2.9 percent and equity markets in Europe and Wall Street turned south, with MSCI’s key index of global equity performance falling almost 1 percent. The three major indices on Wall Street fell more than 1 percent.
The dollar added to gains against the euro, the yen and a basket of major currencies and gold prices fell as Powell’s comments were in general positive for the greenback, said Brad Bechtel, managing director of FX at Jefferies, in New York.
Market participants in general said Powell hewed to a gradual increase in rates, yet some saw his remarks as hawkish.
“It seems that Mr. Powell’s personal views on the strength of the economy have been upgraded since December,” said Jason Ware, chief investment officer at Albion Financial in Salt Lake City.
“So the market is keying off this idea of thinking maybe it won’t be three rate hikes, but maybe four,” Ware said, referring to the Fed’s forecast for 2018.
Peter Cardillo, chief market economist at First Standard Financial in New York, noted that the moment Powell indicated there would probably be more than three rate hikes this year, Treasuries rose, the dollar ticked up while stocks went down.
“If we see the 10-year approach 3 percent we’d probably be on one more downward leg that could take the indices to levels we saw a few weeks ago,” he said. “A very trying period for the market could be ahead of us.”
The dollar index rose 0.6 percent, with the euro down 0.7 percent to $1.223. The Japanese yen weakened 0.41 percent versus the greenback at 107.38 per dollar.
MSCI’s stock index of 47 countries shed 0.89 percent to close at 523.71. The pan-European FTSEurofirst 300 index of leading regional shares fell 0.13 percent to close at 1,498.06.
On Wall Street, the Dow Jones Industrial Average fell 299.24 points, or 1.16 percent, to 25,410.03. The S&P 500 lost 35.32 points, or 1.27 percent, to 2,744.28 and the Nasdaq Composite dropped 91.11 points, or 1.23 percent, to 7,330.35.
Euro zone bond yields initially rose after Powell’s early comments but soon trimmed those gains in line with U.S. bond yields.
Germany’s 10-year bond yields rose 3 bps to 0.677 percent, shrugging off news that German inflation has slowed.
Benchmark 10-year U.S. Treasury notes fell 11/32 in price to push yields up 2.8989 percent.
Oil fell in its first decline in five days, pressured by a firmer dollar and expectations that upcoming weekly data will show an increase in U.S. crude inventories.
Oil dipped before weekly data that is forecast to show rising U.S. crude inventories, though investor confidence in OPEC’s ability to curb output helped stem the price slide.
Brent crude futures settled at $66.63 a barrel, down 87 cents on the day, while U.S. West Texas Intermediate crude fell 90 cents to settle at $63.01.
April U.S. gold futures settled down $14.20, or 1.1 percent, at $1,318.60 per ounce.
Editing by Bernadette Baum, Lisa Shumaker and David Gregorio