Global stocks wobble ahead of US jobs data; bonds in the spotlight

Global stocks were under pressure on Friday ahead of a US jobs report later on that could exacerbate or ease the sell-off in the global bond market, while the pound headed for a fourth daily drop after British debt yields soared to 16-year highs.

Volatility was more subdued in early European trading as traders stuck to their positions ahead of the upcoming employment data after this week’s gyrations across markets.

European stocks eased, with the STOXX 600 down 0.1%, as gains in telecoms and basic materials offset losses in more defensive sectors such as utilities and consumer staples.

Nasdaq futures and S&P 500 futures were down 0.1%, indicating a modestly lower start later on Wall Street, where markets closed overnight to mark the funeral of former US President Jimmy Carter.

The closely watched US nonfarm payrolls report at 8:30 a.m. US Eastern time (1330 GMT) is forecast to show a rise of 160,000 in jobs in December, while unemployment holds at 4.2%.

Anything stronger could see 10-year Treasury yields spike to 13-month peaks and lift the US dollar in the process.

Analysts at ING believe a result below 150,000 new jobs would be needed to stop Treasury yields from rising further.

“Payrolls, as always, are a pivotal report. But we need to deviate materially from consensus to have an effect this time around,” said Padhraic Garvey, regional head of research, Americas, at ING.

“Given the move already in Treasuries, there is some talk that Friday’s numbers will need to be strong to continue this momentum, and in that sense there is some vulnerability for a lower yield reaction to a consensus outcome.” In Asia, Japan’s Nikkei fell 0.9%, taking its weekly loss to 1.6%, while the MSCI index of Asia-Pacific shares outside Japan closed 1.2% lower on the week.

The VIX volatility index, a measure of investor nervousness, was flat on the day in European trading, having touched a three-week high earlier this week, when anxiety about the rise in global long-term bond yields peaked.

Fed officials Patrick Harker, the president of the Philadelphia Fed, and Kansas City President Jeff Schmid signalled they did not believe the central bank needed to cut rates imminently.

This had little bearing on market pricing, as traders have already only priced in around 43 basis points of US rate cuts for 2025. Concerns about President-elect Donald Trump’s potentially inflationary agenda have helped set these expectations and have been at the heart of this week’s rise in long-term bond yields.

The benchmark 10-year US Treasury yield rose 1.7 basis points to 4.6977%, below Wednesday’s eight-month peak of 4.73%. Traders are watching the 4.739% mark, as a break above here could trigger a rise to 5%, a level not seen since 2007.

This week’s near-10 bp rise in Treasury yields has helped push the dollar to a sixth weekly rise. In sharp contrast, British gilt yields have risen nearly a quarter of a percentage point to around 4.8%, their highest since 2008, which has weighed on the pound.

The pound fell for a fourth day on Friday, dropping 0.1% to $1.2293, having hit its lowest since November 2023 overnight, as concern has mounted over Britain’s finances in light of the sharp increase in government borrowing costs, which outweighed the appeal of higher returns on British assets.

A strong US payrolls report could dent sterling further, according to XTB research director Kathleen Brooks.

“A strong payrolls report could add to the selling pressure on UK bonds and increase fears of a fiscal crisis in the UK. It could also weigh on the pound, which has been one of the weakest performers in the FX market since the start of this year,” she said.

In commodities, oil prices rose on Friday, with Brent crude futures up 2.6% to $78.95 a barrel, while European natural gas prices, fell 2.9%, set for a near-9% fall this week.

British assets remained under pressure on Friday from elevated global borrowing costs, with sterling falling for the fourth day in a row and gilt yields rising for a fifth consecutive day, with better-than-expected US jobs data intensifying the moves.

After recording a moderate decline earlier on Friday, the pound continued its slide and gilt yields jumped after US government data showed employers added far more jobs than expected in December.

The pound fell 0.75% against the dollar and hit $1.2194 , its lowest since November 2023, surpassing Thursday’s 14-month low.

British 30-year gilt yields rose to their highest since July 1998 after the data at 5.445%, up 6 basis points on the day, while rate futures markets showed traders trimmed their expectations for Bank of England rate cuts this year to 44 bps from 49 bps.

Benchmark 10-year gilt yields edged up 6 basis points (bps) on Friday to 4.87%, but remained below Thursday’s high of 4.925%, their highest since 2008.

The UK has been among the markets most hit by a surge in global borrowing costs, which most analysts say originated in the US due to concerns about rising inflation, reduced chances of a drop in interest rates, and uncertainty over how US President-elect Donald Trump will conduct foreign or economic policy.

That has sent benchmark US 10-year Treasury yields soaring to their highest since November 2023, propped up the dollar while sending ripples through other currencies and stocks.

Traders on Friday bet the US Federal Reserve will wait until at least June to reduce its policy rate.

But British markets have been among the worst hit, with sterling having lost 1.5% on the week, gilts underperforming peers and domestic focused stocks also struggling.

PRESSURE ON RACHEL REEVES While higher yields can sometimes support a currency, they are not in this case, in part because they are putting pressure on finance minister Rachel Reeves, potentially forcing her to cut future spending.

“There remains clear concern over the likelihood that all of the Chancellor’s fiscal headroom has now been eaten up by the sell-off in gilts, and the anaemic nature of UK economic growth,” said Michael Brown, strategist at Pepperstone.

Traders are paying more to hedge against big swings in the pound than at any time since the March 2023 banking crisis.

One-month options volatility, a measure of demand for protection, hit a high of 10.9% on Thursday.

By Friday, this had retreated to 9.66%. The pound has also lost about 1% against the euro this week.

Eurozone bond yields have also risen, but the yield gap between British 10-year gilts and German 10-year bonds - a gauge of the premium investors demand to hold Britain’s debt - widened about 10 bps this week.

Deutsche Bank said in a note earlier on Friday that investors should sell the pound on a broad trade-weighted basis, and that there might be “further to go” in the recent pound weakness.

“We like selling GBP against a basket of other major currencies,” they said, mentioning the euro, dollar, Swiss franc and Japanese yen.

They also noted that the higher volatility helps reduce the benefit for the pound of higher yields.

One reason why high yields can support of a currency are because they make a unit more attractive for ‘carry trades’ in which traders play yield differentials between different markets.

These trades are much harder when volatility is high as small yield differentials can be wiped out by price swings.

Ten-year gilt yields are up 25 bps on the week. If sustained, that would be their biggest weekly increase since October 2023.

Agencies