Stocks struggle as bond yields stay high

Wednesday 21:05 BST. US and European stocks struggled to make fresh progress as positive news on the eurozone economy was offset by lingering wariness about the prospect of rising borrowing costs.

In New York, the S&P 500 equity index closed down 0.5 per cent at 1,685 – about 1.4 per cent off the record high it struck at the beginning of this month.

Across the Atlantic, the FTSE Eurofirst 300 managed to eke out a gain of 0.3 per cent. But the Tokyo market stood out as the Nikkei 225 Average climbed 1.3 per cent following a 2.6 per cent rise on Tuesday.

The day’s headlines were grabbed by news that the eurozone had emerged from an 18-month recession with forecast-beating growth of 0.3 per cent in the second quarter.

The figures were welcomed by economists, although most remained cautious.

“It is, of course, appropriate to temper any euphoria about today’s upside news with a reminder that, in our view, the recovery in the euro area will be protracted and somewhat underwhelming,” said James Ashley, senior economist at RBC Capital Markets.

“We see little prospect that this positive second-quarter reading will serve as a launch-pad to a strong resurgence across the region over the next few quarters.

“But, equally, we do think that this signals the turning of a corner and the start of an incremental improvement in the euro area’s fortunes.”

Nick Kounis, head of macro research at ABN Amro, said the better eurozone economic data of the last few weeks would be welcomed by the European Central Bank.

“However, it also faces a challenge to ensure that rising short-term interest rate expectations do not lead to an early, unwelcome tightening in financial conditions,” he said.

“As such, we expect the central bank to continue its efforts to reign back market rate expectations with a further stepping up of its forward guidance, in the first instance.”

The yield on the 10-year German government bond held steady – but at 1.81 per cent was within a whisker of a 16-month high hit in June.

Similarly, the 10-year US Treasury yield, although down 1 basis point on the day at 2.71 per cent, was just a few basis points shy of reaching a fresh two-year peak.

Some in the markets attributed Wednesday’s dip in Treasury yields to data showing headline US producer prices were flat in July – which could increase the scope for the Federal Reserve to delay cutting back, or “tapering”, its bond-buying programme.

Others noted that the 10-year yield had risen about 13bp so far this week and looked ripe for a pullback.

But the US figures certainly painted an encouraging picture of the inflation outlook.

“In a nutshell, US PPI confirms the relatively benign scenario for US inflation in the coming months,” said Annalisa Piazza at Newedge Strategy.

“Disinflation looks more likely than rising inflation near-term and the Fed will continue to look at inflation expectations in order to make the correct policy decisions going forward.”

The dip in Treasury yields left the dollar to drift slightly lower.

Against a basket of currencies, the dollar was down 0.1 per cent while the euro was flat at $1.3258. The US unit was a shade lower against the yen at Y98.09.

The broadly softer tone of the dollar helped gold rise 1.1 per cent to $1,335 an ounce while the signs of recovery in the eurozone helped copper gain 0.6 per cent to $7,316 a tonne.

Elsewhere in thecommodities complex, Brent oil reversed an early fall to settle at a four-month high of $110.20 a barrel, as the state of emergency latest unrest in Egypt added to recent concerns about supply disruptions from the Middle East..