GLOBAL MARKETS-T-bill yields fall on Fed expectations; China, Euro bank review hit shares

Angela Moon
Wednesday, 23 Oct 2013 | 2:01 PM ET

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* U.S. Treasuries yields lowest in 3 months as tapering seen delayed

* Wall St down after four record sessions on S&P 500 on weak results

* China short-term rates spike boosts demand for dollar, yen, Swiss franc

NEW YORK, Oct 23 (Reuters) - U.S. Treasuries yields fell to the lowest in three months on Wednesday on reinforced expectations that the Federal Reserve is unlikely to reduce its stimulus efforts in the near term, while global equity markets ended their recent winning streak. On Wall Street, the S&P 500 was down after a four-day streak of record highs as shares of Caterpillar and a number of chipmakers tumbled on weaker-than-expected results. European shares snapped a nine-day winning streak, hit by plans for a tougher stress test for euro zone banks, as well as weak earnings numbers and forecast downgrades in other sectors. The FTSEurofirst 300 index lost 0.6 percent. Global equity markets weakened as China's primary short-term money rates rose on concerns the People's Bank of China may tighten its cash supply to address inflation risks, which could hurt growth in the world's second-largest economy. Shanghai shares fell 1.3 percent. In the U.S. Treasuries market, the focus was largely centered on next week's Federal Reserve policy meeting, where the U.S. central bank is expected to keep its $85 billion a month bond purchase program unchanged. "The Fed is kind of handcuffed from doing any tapering; the consensus is pushing it out to March. The weak (jobs) number supports it," said Sean Murphy, a Treasuries trader at Societe Generale in New York. A Reuters poll conducted on Tuesday showed 9 of 15 U.S. primary dealers see the Fed starting to reduce bond purchases in March, with many of them blaming Washington's fiscal impasse for a "significant" impact on the Fed's timing. The benchmark 10-year U.S. Treasury note was up 11/32, the yield at 2.4709 percent.

TOUGHER BANK HEALTH TESTS The STOXX Europe 600 Banks index dropped 2.1 percent for its weakest day in two months after the European Central Bank said it would review the quality of a broader-than-expected range of assets held by top regional lenders next year. That may result in them having to raise fresh capital. The Spanish IBEX and Italian FTSE MIB recorded their worst sessions since August. On Wall Street, Caterpillar Inc was one of the biggest decliners on the S&P, slumping 6 percent to $83.83 after the heavy-equipment machinery maker cut its full-year outlook for a third time. The Dow Jones industrial average was down 63.61 points, or 0.41 percent, at 15,404.05. The Standard & Poor's 500 Index was down 8.49 points, or 0.48 percent, at 1,746.18. The Nasdaq Composite Index was down 25.25 points, or 0.64 percent, at 3,904.32. MSCI's world equity index, which tracks shares in 45 countries, fell 0.6 percent.

CHINA CONCERNS China's primary short-term money rates rose in a delayed reaction to signals from regulators that they are considering tightening liquidity to tamp rising inflationary pressure. A policy adviser to the People's Bank of China told Reuters on Tuesday that the authority may tighten cash conditions in the financial system to address inflation risks. The benchmark seven-day repo contract, which has been on a steady slide since Oct. 9, rose steeply, with quotes as high as 4.55 percent, up more than a full percentage point from the previous final closing quote. Concerns about soft U.S. jobs data for September, which appeared to rule out a cut in U.S monetary stimulus before next year and caused a plunge in the dollar, took a back seat as Chinese money market rates climbed to levels not seen since July. Rising liquidity needs for Chinese corporate tax payment deadlines and worries about bad banking debt appeared partly responsible for the jump in short-term rates, analysts said. The rate spike was short-lived but caused a market panic nevertheless, causing a scramble for safe-haven currencies. "The weight of a weak U.S. non-farm (payroll data released on Tuesday) is surpassed by rising risk aversion on concerns over China's money market. Profit-taking takes hold," said Camilla Sutton, chief currency strategist at Scotiabank in Toronto. The yen was in demand, pushing the dollar down 0.8 percent at 97.31 yen and the euro 0.9 percent weaker at 134.06 yen. The Swiss franc rose as the dollar and euro both slipped 0.3 percent to 0.8924 and 1.2296 francs , respectively. In commodities trading, U.S. crude fell toward $96 a barrel to its lowest since July, outpacing a smaller drop in Brent futures, pressured by ample supplies and a further inventory build-up in the United States, the world's top consumer. U.S. crude fell $1.00 to $97.30 and earlier reached $96.16, its lowest since July 1. Brent crude fell $1.55 to $108.42 a barrel after hitting a session high of $110.06.

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