Global Stocks Rally Stalls Amid Surging Treasury Yields and Interest Rate Concerns, Dollar Holds Strong at 10-Week Highs | Daily Market Analysis

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Global stock markets attempted a comeback on Tuesday, but the momentum was dampened as benchmark Treasury yields surged to levels not seen in nearly 16 years. Concerns about prolonged higher interest rates contributed to the strength of the safe-haven dollar, which remained close to its 10-week peak.

During US afternoon trading, the MSCI All Country stock index relinquished its earlier gains and stabilized without change, distancing itself further from the 2-1/2 month low it experienced on Friday.

Among the major US indices, the S&P 500 experienced a decline of 0.23%, the Dow Jones Industrial Average dropped by 0.46%, while the Nasdaq Composite Index managed a modest 0.1% increase.

Market participants are eagerly anticipating insights regarding the trajectory of interest rates from central bank officials. Key figures from the Federal Reserve, the European Central Bank, the Bank of England, and the Bank of Japan are scheduled to convene at the annual central bank conference in Jackson Hole, Wyoming, later this week.

Analysts at TD Securities anticipate that Fed Chair Jerome Powell will likely avoid explicitly signaling actions for September but might suggest the possibility of extended higher rates to ensure a reduction in inflationary pressures.

Tech shares spurred a 0.7% surge in pan-European stocks, contributing to the positive performance of the broader European market.

However, the spotlight once again shone on US Treasuries. The yield on the benchmark 10-year Treasury note surged to 4.366%, marking its highest level since 2007 and registering an almost 40 basis points increase for the month. The yield retraced slightly to 4.318% after reaching its peak.

The increase in yields, which move inversely to bond prices, follows unexpectedly positive US economic news. This has led investors to scale back their expectations for future policy easing by the Federal Reserve in the coming year.

These concerns about the potential for interest rates to remain elevated for an extended period and anxieties over the slowdown in China's economy have recently dampened investor enthusiasm for stocks. However, this negative sentiment reversed on Tuesday, sparking a rebound in stock markets.

Current Treasury futures contracts now indicate a projection of 100 basis points (bps) in rate cuts by the Fed by the close of 2024. This is a decrease from the 130 bps projection observed just a few weeks ago.

Meanwhile, inflation expectations have seen minimal movement. This has resulted in a significant surge in "real" yields, which factor in inflation expectations. This development is likely to encourage investors to reconsider the level of risk they are willing to take.

The positive performance of European stocks was primarily fueled by a 2% surge in the technology sector. This surge was driven by optimistic sentiments surrounding Nvidia (NASDAQ: NVDA), the world's most valuable chipmaker, ahead of its upcoming quarterly earnings report.

The dollar index, a measure of the currency's strength against six major developed-market peers, inched up to 103.61. This was only slightly below its 10-week high of 103.68 reached on Friday. Conversely, the euro experienced a 0.39% decline, falling to $1.08535.

China's yuan slightly retraced to approximately 7.30 per dollar after demonstrating signs of stability. Earlier, state banks had intervened in the offshore forwards market to support the yuan's value.

The Japanese yen also garnered attention, with intervention concerns arising due to a meeting between Bank of Japan Chief Kazuo Ueda and the Prime Minister. The yen saw a modest increase of about 0.31%, reaching 145.75 per dollar.