Europe’s main London, Frankfurt and Paris markets <0#.INDEXE> barely budged in early moves, keeping MSCI’s 47- country world index just in the black on Friday, February 23, but facing its third red week in the last four.
Modest gains for the dollar meant the euro was set to post its second biggest weekly loss in nearly four months [/FRX], as caution over the Italian election gave bond markets there their toughest week of 2018.
Polls point to a hung parliament in Italy, where no one party or coalition has an outright majority to form a government, and analysts expect a short-term volatility that could weigh on traditionally sensitive euro zone markets.
Italy’s 10-year bond yield was up 1 bps at 2.09 percent. It has risen about 10 basis points this week.
“Some long-forgotten patterns return to euro bond markets with Bunds rallying while Italy sells off,” said Commerzbank rates strategist Christoph Rieger.
He noted comments from European Commission President Jean-Claude Juncker this week, who was reported to have warned about Italian election risks.
Broader global cross-asset issues remained much the same as they have during a choppy few weeks. How far and fast U.S. interest rates can rise and what would it mean for global borrowing costs, risk appetite and business confidence.
That caution is reverberating in the bond markets with U.S. yields rising by more than 50 basis points since early December, more than the 38 basis points for German government debt.
Benchmark Treasury 10-year note yields rose to a four-year high of 2.957 percent on Wednesday though they were a shade down at 2.904 percent on Friday.
The backsliding also stalled the dollar’s overnight gains in Asia. It was virtually treading water against most major currencies by 0930 GMT, buying 106.8 yen and at $1.2325 and $1.3965 against the euro and pound.
It was still up more than 1 percent for the week and headed for its third gain in the last four weeks.
“We think the Fed could well put U.S. (interest) rates up four times this year but even then it only takes U.S. rates to 2.5 by the end of the year,” said JPMorgan Asset Management global strategist Mike Bell. “So the question is would they continue at that pace in 2019?”
One of the Fed’s chief doves, St Louis Fed President James Bullard, tried to tamp down expectations of four rate hikes on Thursday, saying policymakers needed to be careful not to slow the economy.
Russian markets were readying for a big day with S&P Global due to review Moscow’s credit rating.
It is just one step away from returning Russia to the investment grade bracket that it ejected it from after the 2014-2015 slump in oil prices and Ukraine crisis. Its restatement would also see Russian foreign currency bonds return to some widely-tracked bond indices.
In Asian trading overnight, MSCI’s broadest index of Asia-Pacific shares outside Japan climbed 0.9 percent on Friday to add to the previous week’s 3.9 percent gain.
