U.S. Treasuries gained for a fourth day on Tuesday, the longest winning streak in two months, as demand for safe-haven government debt increased following the U.S. air strike in Syria, which triggered concerns about the extent of U.S. military involvement and effects oil prices. The benchmark 10-year Treasury yield fell 2 basis points (bps) to 2.54%, the lowest level since September 11. German bunds advanced as well with benchmark 10-year yields sliding to 1% for the first time in two weeks.
The rise of ISIS in the Middle East is a geopolitical risk in a region already facing a multitude of conflicts. Thus far, the economic impacts of the ISIS incursion in Iraq and Syria remain subdued and largely limited to those countries. Over time, however, the potential for global spillovers is likely to rise.
U.S. stocks and dollar surged as the Federal Reserve’s latest rate outlook added to signs that monetary policy spilt between the U.S. and other G3 countries is widening. The S&P 500 index gained 0.4% in morning trade, and the Dow average advanced 0.5% to a record high level. The greenback climbed to highest levels in more than six years versus the yen and four years against other major currencies.
U.S. Treasury price volatility rose to a 5-month high as the market is concerned about the Fed meeting today and Scotland votes on independence the following day. Bank of America-Merrill Lynch’s Move index, which monitors price movements in U.S. government bonds based on option trading, climbed to 66.09 yesterday, the highest level since April 2.
Emerging-market benchmark stock index fell for the eighth day and currencies continued to weaken as China’s factory output expanded at the slowest pace since the global financial crisis. The MSCI Emerging Market Index fell 0.8% in afternoon trading, heading for the longest losing streak since last November. A gauge tracking developing-country currencies slid for the sixth day to the lowest level since 2009 with Malaysia’s ringgit and Russia’s ruble depreciating 1% against the dollar.
The dollar is heading for its ninth consecutive week of strengthening as robust U.S. retail sales in August bolstered the case for the Federal Reserve to raise interest rate. The dollar index, a measure of the greenback versus a basket of six major currencies, is on course for its longest run of weekly advances since the first quarter of 1997. Meanwhile, the greenback’s gains have pushed dollar-linked commodity prices lower, with oil prices sliding to the lowest levels in two years and gold tumbling to an eight-month low.
Continued momentum of US economic activity in the third quarter was mirrored in a strengthening labor market, despite a temporary fall in new payroll employment. The Euro Area labor market continues to remain weak amid falling inflation, creating the conditions for additional monetary easing.