By Matt Scuffham and Sujata Rao
NEW YORK/LONDON (Reuters) -U.S. government borrowing costs advanced for a sixth week on Monday on bets that higher interest rates were on the way and global energy shares rose as crude oil prices hit three-year highs of almost $80 a barrel.
Stocks also benefited from an easing in Sino-U.S. tensions and Chinese authorities’ decision to pump in more cash to offset the fallout from real estate firm Evergrande’s woes, while there was some relief that Germany’s election outcome had ruled out a pure left-wing coalition government.
Instead, a coalition of the center-left Social Democrats with the Greens and the liberal FDP looks likely.
The Dow Jones Industrial Average rose 166.16 points, or 0.48%, to 34,964.16, the S&P 500 lost 16.31 points, or 0.37%, to 4,439.17 and the Nasdaq Composite dropped 170.78 points, or 1.13%, to 14,876.92.
The pan-European STOXX 600 index lost 0.27% and MSCI’s gauge of stocks across the globe shed 0.35%.
The oil price surge is stoking speculation that global inflation will prove longer-lasting than anticipated, forcing central banks to act and benefiting so-called reflation investments, which benefit as rates rise.
“All in all, it’s a positive story as we have a strong economic macro story underpinning everything,” said Fahad Kamal, CIO at Kleinwort Hambros in London.
Kamal noted that optimism was reflected in central banks signaling their intent to remove pandemic-era stimulus gradually, which in turn was lifting bond yields.
Oil futures have climbed around $9 a barrel over September.
Coming on top of this year’s 300% surge in European gas prices, the price rises risk further inflaming inflation expectations and hastening the end of super-cheap money.
Goldman Sachs (NYSE:GS) forecast Brent to hit $90 per barrel by year-end, adding “the current global oil supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above-consensus forecast.”
Investors are therefore repositioning portfolios. U.S. 10-year Treasury bond yields, a key determinant of global capital costs, jumped 9 basis points last week while the industrials-heavy Dow Jones index outperformed the Nasdaq index of tech stocks.
On Monday, U.S 10-year Treasury yields hit 1.5% for the first time since June. Benchmark 10-year notes last fell 9/32 in price to yield 1.4923%, from 1.461% late on Friday.
German 10-year government borrowing costs overcame an early dip to hit a three-month high of -0.210,
The stronger rise in U.S. yields, especially on an inflation-adjusted basis, is also lifting the dollar. The dollar index rose 0.194%, with the euro down 0.18% to $1.1693.
Worries persist about China, however.
A power supply crunch that is triggering an industrial contraction and pressuring the economic outlook is adding to concerns stemming from property firm Evergrande, which missed a bond coupon payment last week and faces another in coming days.
Hong Kong-listed shares in Evergrande’s electric car unit plunged as much as 26% after it warned it urgently needed a swift injection of cash.
Still, Chinese blue chip shares gained 0.5%, thanks to another cash injection from the central bank and hopes the release of Huawei executive Meng Wanzhou would reset ties with the West.
“The energy shortages are coming on top of Evergrande and the regulatory crackdown. These things are unrelated but happening in quick succession could lead to something more serious,” Kamal said.
Focus shifts now to U.S. fiscal policy – the House of Representatives is due to vote on a $1 trillion infrastructure bill, while a Sept. 30 deadline on funding federal agencies could force the second partial government shutdown in three years.
Treasury yields, energy stocks rise as oil hits 3-year high