Bonds slump deepens on shifting policy outlook, commodities rise

Bloomberg.- Government bonds tumbled around the world, deepening their worst monthly loss since September 2014, as a brightening economic outlook strengthened the case for central banks to step back from looser monetary policy. Stocks fluctuated amid a mixed batch of earnings reports.

U.K. gilts led the selloff, with yields jumping to the highest since the nation voted to quit the European Union as a report showed third-quarter growth exceeded economist estimates. Treasury 10-year note yields rose to a level last seen in early June before an auction of $28 billion of seven-year notes. Norway’s krone surged after the central bank kept its benchmark interest rate unchanged for a fourth meeting. Commodities rose, buoyed by industrial metals, and crude oil advanced toward $50 a barrel.

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As the economic picture improves, traders are gaining confidence that central bankers will shift away from exceptional policies aimed at boosting growth. After Thursday’s better-than-forecastU.K. data, investors pared bets that the Bank of England will cut interest rates again to cushion the blow from the Brexit referendum. Bank of Japan Governor Haruhiko Kuroda meanwhile said the central bank may not need to buy 80 trillion yen ($765 billion) of bonds every year to achieve its target of a 10-year yield of around zero. Treasury 10-year yields have risen the most this month since February 2015 as investors prepare for the Fed to raise interest rates.

“It’s a fairly slow walk away from ultra-accommodative policy,” said John Wraith, head of U.K. rates strategy at UBS Group AG in London. “The problem that has occurred in the past is that whenever the market starts to price in tighter policy or higher yields, it starts to seep through in a way that slows things down without them ever getting to the point of tightening policy.”

Bonds

The two-year yield gilt rose three basis points, or 0.03 percentage point, to 0.30 percent at 8:08 a.m. New York time, and touched 0.33 percent, the highest since June 23. The Bank of England’s next interest-rates decision is scheduled for Nov. 3.

Euro-area bonds slumped, tracking declines in U.K. securities. Yields on German 10-year bunds, the region’s benchmark, climbed six basis points to 0.14 percent, rising for a fifth-straight day, the longest run since July. Yields on similar-maturity Spanish bonds rose five basis point to 1.17 percent.

The yield on Treasuries due in a decade increased three basis point to 1.83 percent, the highest since June 2. Bonds around the world are on course for their worst month since September 2014, handing investors a 2.5 percent loss, according to the the Bloomberg Barclays Global Aggregate Index.

The U.S. 10-year break-even rate, a gauge of the outlook for inflation in the next decade, climbed to 1.74 percentage points, its highest level since July 2015. Reports on durable-goods orders, pending home sales and initial jobless claims are due on Thursday.

Currencies

Norway’s krone rallied versus all of its major peers, with the biggest gains coming versus the Turkish lira and South Korean won, as the central bank kept its benchmark interest rates at a record-low 0.5 percent, having scrapped plans for more stimulus amid signs oil prices are recovering and the country’s housing market is heating up. The currency appreciated 0.6 percent to 8.2319 per dollar.

While the krone advanced, Sweden’s krona slid after the nation’s central bank said it stands ready to extend bond purchases into next year and signaled it will keep interest rates lower for longer in its quest to bring inflation back toward its target. The Swedish currency weakened 0.9 percent versus the dollar even as the Riksbank kept its benchmark repo rate at minus 0.5 percent, refraining from adding to its record stimulus.

The won sank 0.7 percent versus the dollar and Turkey’s lira dropped 0.7 percent, leading declines in emerging markets. Mexico’s peso fell 0.4 percent, extending a 0.9 percent on Wednesday when a Bloomberg poll showed Donald Trump ahead in Florida, a battleground state, less than two weeks before the U.S. presidential election.

A gauge of developing-nation currencies declined 0.4 percent, the most since Oct. 13, while the MSCI Emerging Markets Index of shares dropped 0.5 percent.

The yen weakened 0.2 percent to 104.72 per dollar, approaching a three-month low. The overwhelming majority of economists surveyed by Bloomberg News expect the BOJ to keep stimulus unchanged when Kuroda and the policy board meet Oct. 31-Nov. 1 to assess the progress of their new yield-control framework.

Stocks

The Stoxx Europe 600 Index was little changed, after rising as much as 0.5 percent, and also sinking as much as 0.5 percent. Futures on the S&P 500 expiring in December rose 0.3 percent.

Among stocks moving on earnings:

– Barclays Plc rose 2.5 percent after posting an increase in profit, topping analysts’ estimates.
– Deutsche Bank AG climbed as much as 3.4 percent before trading little changed after it unexpectedly returned to profit.
– Chipmaker STMicroelectronics NV jumped 10 percent after saying its forecast for fourth-quarter gross margin exceeded estimates.
– Tesla Motors Inc. climbed 4.8 percent in early New York trading after posting a profit and saying it expects to get through the rest of the year without raising cash.
– Amec Foster Wheeler Plc plunged 19 percent after the energy-services company said it sees continued weakness in some key markets.
– Telefonica SA slid 2.6 percent after Europe’s most indebted phone company said it will cut its dividend.
– ABB Ltd. tumbled 6.7 percent after the Swiss industrial company reported a decline in orders, seen as an indication of future sales.
– Nokia Oyj lost 6.9 percent after posting a sales decline.
– Groupon Inc. fell 8.6 percent in U.S. premarket trading after reporting a quarterly loss and agreeing to buy rival to buy LivingSocial Inc.

While analysts are forecasting profit contractions for companies in the Stoxx 600 and S&P 500 this year, reports have so far come in better than expected. Of the 215 members of the U.S. benchmark index that have announced results this season, almost 80 percent have beaten net income projections, while more than 60 percent topped sales estimates.
Twitter Inc., Dow Chemical Co., Ford Motor Co., United Parcel Service Inc. and Alphabet Inc. are also among companies reporting earnings on Thursday.

The MSCI Asia Pacific Index was down 0.7 percent. Benchmarks in Australia and Hong Kong were the region’s worst-performing benchmarks with declines of more than 1 percent.

Commodities

Crude oil rose 0.3 percent to $49.34 a barrel in New York, after sliding 1.6 percent on Wednesday as data showed a pickup in U.S. production. Organization of Petroleum Exporting Countries officials will meet this week to try to resolve differences over how much individual members should pump once planned output reductions are in force, with Iraq among the list of countries saying it should be exempt from the cuts. The proposed limits will be put to the group for approval at a meeting next month in Vienna.

Copper, aluminum and nickel all rose, extending this week’s gains, even as a report showed profit growth at Chinese industrial companies moderated to 7.7 percent in September, following a 19.5 percent jump in August that was the biggest jump in three years.

France’s November power prices extended a four-day streak of gains amid supply concerns from extended outages at nuclear plants. The contract climbed as much as 2.2 percent to a record 90.20 euros ($98.53) a megawatt-hour, the highest month-ahead price for 8 years. The 2017 price also increased to an all-time high.

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