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Stocks, Yields Decline as Fed Pivot Saps Reflation: Markets Wrap

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(Bloomberg) — Stocks slid Monday and Treasury yields fell as traders soured on the reflation trade in the wake of a hawkish pivot by the Federal Reserve. The dollar remained at about a two-month high.

Japan led the Asian equity retreat, with the Nikkei 225 dropping as much as 3.4%, while U.S. futures edged down after an S&P 500 slump. Hong Kong fell and Chinese shares were modestly lower. Treasury yields slipped, taking the 30-year rate below 2% for the first time since February, as the prospect of less accommodative U.S. monetary policy buffeted markets.

The flattening of the Treasury yield curve is another illustration of the retreat in reflation bets. Short-maturity yields surged after Fed official James Bullard said inflation risks may warrant higher interest rates next year, an earlier liftoff than penciled in by many of his colleagues.

In Hong Kong, China Evergrande Group fell to the lowest in four years, underscoring renewed concerns about the financial health of the world’s most indebted developer.

In a light week for economic data, traders will be paying close attention to appearances by Fed policy makers, including Chair Jerome Powell, for any guidance on the winding back of stimulus. In his comments, Bullard also said that the central bank has started discussing tapering asset purchases.

“We have another possibly two years before the Fed starts to take action,” John Woods, Asia Pacific chief investment officer at Credit Suisse Group AG, said on Bloomberg Television. “So I do anticipate there will be a period of choppy, sideways trading as the volatility associated with this debate in the Fed is reflected in pricing, but absolutely I take the view that yields will tick a little higher.”

Gold stabilized after slumping last week. Oil climbed above $72 a barrel as talks between world powers and Iran dragged on, potentially delaying the return of the latter’s energy exports.

For more market commentary, follow the MLIV blog.

Here are some events to watch this week:

St. Louis Fed President James Bullard, Dallas Fed President Robert Kaplan and New York Fed President John Williams are among Fed speaker throughout the weekEuropean Central Bank President Christine Lagarde addresses the European Parliament MondayFed Chair Jerome Powell testifies at a House Subcommittee hearing on the Fed’s pandemic emergency lending and its asset purchase programs TuesdayBank of England interest rate decision Thursday

These are some of the main moves in financial markets:

Stocks

S&P 500 futures slipped 0.3% as of 10:49 a.m. in Tokyo. The gauge fell 1.3% FridayNasdaq 100 futures were 0.1% lower. The index fell 0.8%Japan’s Topix index shed 2.5%Australia’s S&P/ASX 200 Index dropped 1.8%South Korea’s Kospi index fell 0.9%Hong Kong’s Hang Seng Index declined 1.2%China’s Shanghai Composite Index retreated 0.2%

Currencies

The yen was little changed at 110.17 per dollarThe offshore yuan traded at 6.4583 per dollar, up 0.1%The Bloomberg Dollar Spot Index was steady after rising 0.4% FridayThe euro was at $1.1870

Bonds

The yield on 10-year Treasuries dipped two basis points to 1.42%Australia’s 10-year yield fell five basis points to 1.55%

Commodities

West Texas Intermediate crude rose 1% to $72.33 a barrelGold rose 0.5% to $1,772.19 an ounce

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