Volkswacht Bodensee - Stock markets drop as rate fears take hold

Investors are focusing in particular on US Treasury bond yields that have surged to levels not seen in over a decade, suggesting doubts about prospects for growth and corporate earnings.

"Concerns are spreading that if higher borrowing costs bed in they will weigh heavily on companies and consumers, at a time when the effect of previous rate hikes has yet to be felt," said Susannah Streeter, head of money and markets at Hargreaves Lansdown.

The wary outlook was heightened by comments from a senior Federal Reserve official suggesting no easing of monetary policy anytime soon.

"The most important question at this point is not whether an additional rate increase is needed this year or not, but rather how long we will need to hold rates at a sufficiently restrictive level to achieve our goals," Fed Vice Chair for Supervision Michael Barr said Monday.

"I expect it will take some time," he added, with analysts noting he did not rule out another rate hike on top of the 11 made since March 2022.

The yield on the benchmark 10-year Treasury bond has reached the highest level since 2007, while the 30-year bond yield was at its highest since 2010.

For investors, that raises the prospect of high inflation and high borrowing rates that could dent corporate earnings and push up unemployment -- lowering the chances for the "soft landing" sought by Fed officials.

Since September, stock indices on both sides of the Atlantic have erased much of the gains seen since the beginning of the year -- in Paris, the CAC 40 fell below 7,000 points at one point for the first time since March.

"Sentiment remains cagey with investors showing no desire to hold onto any gains," said Fawad Razaqzada, a market analyst at StoneX.

He noted that oil prices were recovering from a recent bout of profit-taking, as investors awaited an OPEC ministerial meeting on Wednesday to see if prices will resume their run of gains despite the prospect of sluggish growth.

"Rising oil prices could make stagflation even worse for oil-importing countries in the eurozone, Japan and China, among others," he said.

Asian indices also ended mostly lower with Hong Kong leading the decline, falling nearly 2.7 percent as the market reopened after a holiday weekend.

Going against the flow, heavily indebted Chinese property giant Evergrande saw its share price surge more than a quarter as it resumed trading in Hong Kong days after announcing that its boss was under criminal investigation.

On foreign exchange markets, the dollar extended recent gains against major currencies, tracking the rise in US interest rates.

Russia's currency meanwhile continued to weaken on signs the country's economy is facing slower growth and higher inflation as the fighting in Ukraine drags on.

The ruble crossed the psychological threshold of 100 to the dollar on the Moscow financial exchange -- having already done so in August before recovering -- raising the prospect of weaker spending power for Russians forced to pay more for imported goods.

- Key figures around 1345 GMT -

New York - Dow: DOWN 0.4 percent at 33,292.67 points

London - FTSE 100: DOWN 0.2 percent at 7,499.77 points

Frankfurt - DAX: DOWN 0.7 percent at 15,141.52

Paris - CAC 40: DOWN 0.8 percent at 7,012.88

EURO STOXX 50: DOWN 0.7 percent at 4,108.30

Tokyo - Nikkei 225: DOWN 1.6 percent at 31,237.94 (close)

Hong Kong - Hang Seng Index: DOWN 2.7 percent at 17,331.22 (close)

Shanghai - Composite: Closed for a holiday

Euro/dollar: DOWN at $1.0476 from $1.0484

Pound/dollar: DOWN at $1.2087 from $1.2094

Euro/pound: UP at 86.69 pence from 86.66 pence

Dollar/yen: UP at 149.91 yen from 149.84 yen Monday

Brent North Sea crude: UP 0.2 percent at $90.93 per barrel

West Texas Intermediate: UP 0.7 percent at $89.42 per barrel

burs-bcp/js/bp

R.Flueckiger--VB