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Wall Street loses steam as Fed, China worries keep yields higher


By Huw Jones and Pete Schroeder

LONDON/WASHINGTON (Reuters) -Global shares were stuck around two-month lows on Friday as Wall Street opened lower, capping a week that saw U.S. yields soar to near 16-year peaks as investors prepped for interest rates to remain higher for longer.

U.S. stocks opened weakly in early trading on a slow day for economic data, adding to losses posted earlier in the week.

The Dow Jones Industrial Average was down 0.11% shortly after the open, with the S&P 500 slipping 0.31%and the Nasdaq Composite falling 0.7%.

The MSCI All Country stock index was down 0.56%, hitting its lowest since early June after falling 5.85% during August, though it remains 10% up for the year.

“The US calendar is empty today and the focus will likely be on bond market dynamics after back-end yields touched fresh multi-year highs yesterday,” ING bank analysts said.

In bond markets, yields on benchmark 10-year U.S. Treasuries stepped back slightly after flirting with 16-year highs earlier in the week, as investors adjusted for the possibility Fed officials may opt to keep rates higher for longer after a steady diet of strong economic news out of the U.S.

Ten-year yields were last at 4.251%, after reaching 4.328% on Thursday. A break above the 4.338% level reached in October would bring yields to their highest since November 2007.

The greenback looked well-positioned for a fifth consecutive week of gains, its longest winning streak for 15 months, helped by the prospect of U.S. interest rates remaining high or rising even further, and a safe haven in the face of growing risks in China. The dollar index, which tracks the currency versus a basket of six competitors, was down 0.14%.

Minutes from the Federal Reserve this week showed most members of the rate-setting committee continued to see significant upside risks to inflation, suggesting more hikes are in the pipeline.

Attention now turns to the Fed and other top central banks’ annual gathering in Jackson Hole, Wyoming, next week, with investors set to scrutinise a speech from Fed Chair Jerome Powell on Aug. 25 for fresh clues on what comes next for interest rates.

“We view the event as a good opportunity for Powell to start laying the ground for the next step in the Fed’s policy guidance: no longer focused on how many hikes to expect, but rather on rates remaining ‘higher for longer,’” said TD Securities analysts in a note.

Markets are already scaling back rate cuts bets next year.

Crude oil looked poised to snap a seven-week winning streak as China’s slowing economic growth clouded the picture for demand.

Brent crude was last up 0.15% at $84.25 a barrel. U.S. crude jumped 0.41% to $80.72 a barrel.

There was little market response to news of a package of measures from China’s securities regulator to revive a sinking stock market.

Investors were keeping a close eye on the liquidity crunch that appeared to be spreading to China’s vast shadow banking sector, with Zhongzhi, a major Chinese asset manager, telling investors it needs to restructure its debt.

The yen was trading at 145.32 against the dollar, having been hammered this week to a nine-month low of 146.56 per dollar as yield differentials between the U.S. and Japan widened. It is near levels that sparked an intervention by Japanese authorities late last year.

Gold was 0.2% higher at $1,893 per ounce.

(Editing by Toby Chopra, Mark Potter and Nick Macfie)

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