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Global stocks drop as bond rates jump due to inflation fears

Global shares fell on Friday, as fears of inflation overtook investor euphoria about tech stocks. Bond yields rose and expectations for interest rate hikes in 2019 increased.

MSCI's world stock index fell by 0.35%. Europe's STOXX600 dropped 1.36% after?rising the previous two sessions.

Nasdaq and S&P futures both fell by 1.53%, while the Nasdaq index futures dropped by 1.09%. Wall Street had hit new highs after a 4% rise in AI darling Nvidia.

MSCI's broadest Asia-Pacific share index outside Japan dropped 2.57%. Japan's Nikkei fell 1.99% following data showing wholesale inflation increased to 4.9% in the month of April, marking the highest pace in the last three years. This kept the Bank of Japan in line to raise interest rates. In the past few days, "it has been a relentless rally." "I think that this rally has reached a point of exhaustion," said Tim Graf. He is the managing director and head macro strategy at State Street Markets. He added, however, that the equities market remains supported.

He said: "I think that if there is anything enough to create a retreat, it's what is happening on the rate markets. And it's the prospect of inflation remaining above target. They'll probably have to tighten up."

The price of oil rose as the uncertainty surrounding a Middle East Peace Deal and the reopening of "the Strait of Hormuz" remained in focus. Brent crude futures rose by 3.47%, to $109.39 per barrel. This is on track for an 8.7% weekly increase.

Attention has also been focused on Beijing, where U.S. president Donald Trump concluded a state trip. Trump stated that after meeting Chinese President Xi Jinping they both agreed Iran should not have a nuclear weapon. They also agreed to reopening the Strait of Hormuz.

"President Trump is currently in China and it's a nice break from the Iran war anxiety. Padhraic garvey, regional director of research for the Americas, ING, said: "But that's what we're going back to."

"The main issue remains delivered inflation. This is troubling for the Treasury market." We continue to maintain our view that yields will be tested on the upside in the coming weeks.

The global bond market was under pressure Friday as rising inflation risks, fueled by higher oil costs, increased the pressure. The yields on the German 10-year bond, which is the benchmark for the Eurozone, rose last week by around 6 basis points, to 3.1065%. Meanwhile, Japanese yields reached record highs. The yields on U.S. 2-year notes US2YT=RR increased?7.5 basis points to 4.0666% and the yields on 10-year notes US10YT=RR went up 8.5 basis points to 4.5438%. Demand for U.S. Treasuries was also affected by inflation concerns, as a series of weak auctions in this week highlighted the fragility of the market.

The lack of progress on the Gulf supported the dollar's 1.3% weekly increase - the highest in two months.

The strength of the dollar pushed the yen down to a 'weaker' side of 158 yen per dollar, and traders were on alert for any further Tokyo intervention.

The pound fell to $1.3351 (a low for about a month), after falling 0.9% the previous session, following the resignation by Wes Streeting as health minister, deepening Britain’s political crisis. Reporting by Sophie Kiderlin from London and Stella Qiu from Sydney. Sam Holmes and Mark Potter edited the article.

(source: Reuters)