Stocks fall further as U.S. yield climb unnerves investors

Stock markets fell again on Monday as U.S. Treasury yields reached a new two-year high and investors fretted about the prospect of rising interest rates and a surge in COVID-19 infections.

Monday`s drop follows on from a bruising first week of the year when a strong signal from the Federal Reserve that it would tighten policy faster to tackle inflation, and then data showing a strong U.S. labour market, unnerved investors who had pushed equities to record highs over the holiday period.

Technology stocks, which have soared the past two years thanks in part to very low interest rates, led the falls while investors bought into lower-valued energy and financial shares.

The drop on Monday was limited but across markets.

By 1150 GMT the Euro STOXX dropped 0.37%, Germany`s DAX weakened 0.34% while Britain`s FTSE 100 slipped 0.05%.

Futures on Wall Street pointed to a weaker open. The S&P 500 suffered its worst start to the year since 2016.

Asian shares bucked the trend on Monday. MSCI`s broadest index of Asia-Pacific shares outside Japan added 0.63%

A busy week sees U.S. inflation data due on Wednesday, which analysts say could show core inflation climbing to its highest in decades at 5.4%, a level that would all but confirm a U.S. rate rise is coming in March. The season of corporate earnings also kicks off this week with the big U.S. banks reporting from Friday onwards.

"The persistent rise in consumer inflation could further boost the Fed hawks, bring them to price a steeper normalization path, and more importantly fuel the expectation that the Fed should rapidly reduce the size of its balance sheet to avoid flattening the yield curve while fighting back inflation," said Ipek Ozkardeskaya, an analyst at Swissquote.

Ozkardeskaya added that there was "plenty of hawkishness" yet to be priced into assets.

While the December payrolls number released last week did miss forecasts, the drop in the jobless rate to just 3.9% and strength in wages suggested the economy was running short of workers.

Markets quickly shifted to reflect the risks with futures implying a greater than 70% chance of a rise to 0.25% in March and at least two more hikes by year end.

FURTHER TO RUN?

Yields on 10-year U.S. Treasury notes hit 1.80% in early trading - levels last seen in early 2020, having shot up 25 basis points last week in their biggest move since late 2019. The yield later retreasted to 1.77%.

"We think that the increase in long-dated Treasury yields has further to run," said Nicholas Farr, an economist at Capital Economics.

"Markets may still be underestimating how far the federal funds rate will rise in the next few years, so our forecast is for the 10-year yield to rise by around another 50bp, to 2.25%, by the end of 2023."

Germany`s 10-year benchmark yield dropped after an earlier rise to -0.025%, closer to the 0% level it last traded at in 2019.

The dollar index edged up to 95.911. The greenback has failed to find significant support from rising Treasury yields.

The euro stood at $1.1323, down 0.3% on the day, while the Japanese yen got a brief break from its recent bear run to trade up at 115.3.

In commodity markets, gold gained 0.26% to $1,800 an ounce but short of last week`s top of $1,831.

Oil prices dipped but held to recent gains, having climbed 5% last week helped in part by supply disruptions from the unrest in Kazakhstan and outages in Libya.

Brent slipped slightly to $81.69 a barrel, while U.S. crude traded diown 0.14% to $78.79.