By Richard Leong and Jamie McGeever
NEW YORK (Reuters) – Stocks on major world markets fell on Wednesday, as European borrowing costs reached their highest level this year, while the U.S. dollar slumped against major currencies after weak American economic data.
Improving European economic data is easing the fear of deflation, pushing up bond yields in the euro zone, while persistently weak U.S. economic data in the first four months of the year, along with poor corporate earnings, is calling the valuation of equities into question.
“Markets can handle slowly, gradually-rising interest rates as an economy continues to improve. The uncertainty is that these are pretty significant moves,” said Chuck Carlson, chief executive officer at Horizon Investment Services in Hammond, Indiana. “That’s why you’re staring to see stocks sell off a little more aggressively.”
U.S. Federal Reserve Chair Janet Yellen also warned of high stock market valuations contributing to weakness in U.S. equities.
The Dow Jones industrial average closed down 0.48 percent at 17,842.99., while the S&P 500 stock index lost 0.44 percent to 2,080.18, a low not seen since early April.
“The fire got stoked from Janet Yellen. It provided more fuel to the sell-off,” said Kristina Hooper, head of portfolio strategies at Allianz Global Investors in New York.
The FTSEurofirst 300 index .FTEU3 of top shares finished 0.5 percent weaker at 1,547.72 points.
“The euro is strengthening and that has taken some of the earlier tailwinds away from the market,” Gerhard Schwarz, head of equity strategy at Baader Bank, said, noting a stronger currency was negative for Europe’s export-oriented companies.
Japanese stocks slipped as traders reduced their exposure ahead of Golden Week holidays in Japan.
The MSCI world equity index, which tracks shares in 45 nations, fell 0.4 percent to 433.58.
GLOBAL BOND ROUT
Bond yields continued to rise in Europe and the U.S. despite the standoff between Greece and its lenders [ID:nL5N0XX2WU} and in the face of disappointing data on private U.S. jobs growth.
Large corporate bond sales by Apple Inc and Royal Dutch Shell also added some supply pressure [US/].
Longer-maturity Treasuries yields rose the most, with the yield on the 30-year bond nearing 3.0 percent, a level last seen on Dec. 5. Yields on the 10-year Treasury hit their highest level since March 9.
Bond yields in Europe and the U.S. have been rising as deflation fears have eased with recovering oil prices, and in anticipation of a Federal Reserve interest rate rise later this year.
Germany’s 10-year government bond yield hit a 2015 high just under 0.6 percent after striking a record low of 0.05 percent last month.
Bond prices are seen staying weak until at least Friday’s U.s. Labor Department monthly unemployment report which may clarify the outlook for the U.S. economy.
Low liquidity in global bond markets after central banks around the world bought up large amounts of government debt in recent months are also exacerbating the moves in bond markets.
“From a macro perspective the sell-off was long overdue,” said Jan von Gerich, chief fixed income analyst at Nordea in Helsinki. “You can always find reasons in such numbers but I wouldn’t say this was the underlying cause. Yields were at such low levels that real money investors simply were not interested anymore.”
U.S. DOLLAR SLIDE
The U.S. dollar hit its lowest level against the euro since late February on Wednesday, after a rise in European yields drove demand for the euro, and weak U.S. private sector employment data supported expectations that the Federal Reserve may delay raising interest rates.
The rise in European bond yields is “clearly what’s helping the euro along here,” said Thierry Albert Wizman, global interest rates and currencies strategist at Macquarie Ltd in New York.
The euro rose over 1.5 percent against the greenback and hit $1.13710, its highest level in about 10 weeks. The yield gap between U.S. 10-year Treasury yields and their German counterpart shrank to about 165 basis points, the narrowest since late March, making the euro more attractive to investors chasing yields.
The dollar index was last down 1.0 percent at 94.116.
OIL PRICES AT 2015 HIGHS
Crude oil prices rose to 2015 peaks on Wednesday after the first fall in U.S. crude inventories since January.
The U.S. dollar’s fall also supported oil and other commodity prices as those raw materials became more affordable for holders of the euro and other currencies.
U.S. crude futures rallied more than $2 to the year’s high of $62.58 a barrel, before settling just 53 cents higher at $60.93.
North Sea Brent, the more widely-used benchmark, reached a 2015 peak of $69.63.
(Additional reporting Marius Zaharia in London, and Saikat Chatterjee in Hong Kong. Editing by Clive McKeef)