US Stock Futures Fall as High Yields Sour Markets Wrap

US stock futures continued their downward trend as worries about tight monetary policy were fueled by Treasury rates approaching their highest level this year.  

A 0.4% drop in US equity contracts pointed to a second straight day of losses on Wall Street, while the Stoxx 600 in Europe crept up on gains for online car marketplace Auto Trader Group Plc and drugmaker Novo Nordisk A/S. In the previous two days, the yield on the 10-year Treasury rose 15 basis points, and it has now settled around 4.60%.  

With US rate-cut expectations dwindling and inflation remaining sticky, global markets are poised for their worst week since mid-April. Concerns that the US deficit will force rates higher were exacerbated by Wednesday's dismal US auction results.  

Investors may adjust their monetary policy forecast based on data this week: U.S. GDP figures will be released later on Thursday, while US and European inflation reports are scheduled for release on Friday.  

Bond market genie and higher yields have enchanted the market, according to IG Australia Pty Ltd.'s Tony Sycamore, a market analyst. "Implation data from the United States or Europe that is stronger than expected tomorrow could shift the focus to managing downside risks."  

According to Karim Chedid, the head of EMEA investment strategy at BlackRock International Ltd., the company is getting "more targeted" on bond length, focusing on the front and belly of the US Treasuries curve, as the optimism for US rate cuts diminishes. "We see that as the area where you're still getting the most bang for buck in terms of income for stability." So said he.  

According to Chedid, there are increasing flows into European and Japanese shares, even if the asset management behemoth still considers IT companies to be one of its "key sector overweights" due to the fundamentals that have supported their recent advance.  

Credit for the uptick goes to "a bottoming out in the macro data in Europe, which investors are liking," and the possibility of a rate decrease from the European Central Bank at its June meeting, according to Chedid. "In Europe, earnings have seen a considerable improvement over the past 12 months."  

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