LONDON/TOKYO (Reuters)

World stocks dropped for a second successive day on Wednesday, jolted by the recent push higher in US Treasury yields ahead of inflation data that could inform the pace of Federal Reserve policy easing.

MSCI’s all country world index was last down 0.17 per cent, with shares in Europe down a whisker after the previous day’s 2 per cent loss and Asia fell. [.EU]

US share futures were a touch lower too, after all major US benchmarks closed lower on Tuesday. [.N]

Weighing on sentiment was Tuesday’s sharp rise in US Treasury yields that saw the benchmark 10-year yield jump 12 basis points (bps) and the two-year yield rise 9 bps to its highest since late July as the market reopened after the Veterans Day holiday. [US/]

They steadied on Wednesday, with the 10-year yield at 4.43 per cent and the two-year yield at 4.35 per cent.

Bond yields have soared since Donald Trump was elected back to the White House last week on expectations lower taxes and higher tariffs will increase government borrowing and push up the fiscal deficit. Trump’s proposed policies are also seen by investors as fuelling economic growth and inflation, potentially impeding the path to lower Fed interest rates.

But, analysts say, there is more to come as the Republicans sit within striking distance of winning a majority in the House of Representatives and with it full control of Congress.

“We are still in the midst of the repricing of the Trump trade,” said Samy Chaar, chief economist at Lombard Odier. “There was this slight uncertainty around the House, but now we’re close to certainty when it comes to a Republican sweep.”

Traders currently lay 62 per cent odds for the Fed to cut rates by a quarter point on December 18 at the conclusion of its next policy meeting, according to CME Group’s FedWatch Tool. A week earlier, the probability was 77 per cent.

A hot reading of the US consumer price index (CPI) due at 1330 GMT could see those odds reduced further, with economists projecting a 0.3 per cent monthly rise in the core gauge.

The CPI print “is not necessarily a number you’ll be putting a lot of attention on — the signal from the labour market is showing that inflation will slow to target — but there is this feeling that if the US economy might be on a higher octane path, a high CPI could put pressure on the Fed,” said Chaar.

Strong dollar

In currency markets, higher Treasury yields continued to underpin the dollar which is trading at a six month high against a basket of major peers..

The euro was last at $1.0601, down 0.1 per cent on the day at around its lowest in a year, and the Japanese yen was also weaker at 155 per dollar, nearing levels that could push Japanese authorities to step in to prevent their currency weakening further. [FRX/]

Japan’s finance ministry currency czar Atsushi Mimura said last week that officials “are ready to take appropriate actions if necessary when excess moves are seen”.

Technically, if the dollar were to break above 155 yen, “there’s a blank space from 155 to 158, so the pair could rise quickly and test 158, where Japan’s Ministry of Finance intervened in May”, said Shoki Omori, chief Japan desk strategist at Mizuho Securities.

The People’s Bank of China pulled the yuan off a three-month low versus the dollar by setting firmer than expected official guidance for the exchange rate, signalling growing discomfort over the currency’s recent rapid decline.

Commodities remained pressured by the dollar’s strength and as traders worried about the outlook for key consumer China, which stands to bear the brunt of Trump’s threatened trade tariffs. Stimulus announcements from Beijing so far have failed to stir much optimism over an economic revival.

Copper prices hit a two month low of US$9,094, a drop of more than 6 per cent since the US presidential election last week. [MET/L]

Crude oil rebounded a touch after hitting to its lowest in two weeks on Tuesday after OPEC cut its forecast for global oil demand growth this year and next, highlighting weakness in China and some other regions.

Brent futures added 0.7 per cent to US$72.38 a barrel, while US West Texas Intermediate (WTI) crude rose 0.5 per cent to US$68.48. [O/R]

Gold rose 0.3 per cent to US$2,605 per ounce, following its slump to a nearly two-month low of US$2,589.59 in the previous session, pressured by dollar strength. [GOL/]