Shares dogged by oil weakness; Treasury yield curve flattens

By Sam Forgione

NEW YORK (Reuters) - Declines in financial and energy shares weighed on U.S. and European equity markets on Wednesday, with U.S. crude prices touching 10-month lows, while the U.S. Treasury yield curve hit the flattest in nearly a decade.

The U.S. S&P 500 financial sector <.SPSY> was last down about 0.7 percent while the European Stoxx Europe 600 Financial Services index <.SXFP> closed down 1.3 percent.

The financial sector fell as the U.S. Treasury yield curve held near 10-year lows, with European financials punished by heavy losses from British subprime lender Provident Financial Plc .

Flattening in the yield curve, or the narrowing in the difference between short- and long-term yields, can weigh on banks' profitability

 

A drop in U.S. crude prices to a 10-month low of $42.05 per barrel and a decline in benchmark Brent crude to a seven-month low of $44.35 per barrel pressured energy shares on nagging fears about global oversupply.

The U.S. Nasdaq Composite bucked the trend of weaker equity indexes, rising on gains in biotechnology stocks.

So far this year, oil has lost more than 20 percent in value, its weakest performance for the first six months of the year since 1997.

Brent crude settled down $1.20, or 2.61 percent, at $44.82 per barrel. U.S. crude settled down 98 cents, or 2.25 percent, at $42.53 per barrel.

"Oil has perhaps tempered some sentiment near-term," said Terry Sandven, chief equity strategist at U.S. Bank Wealth Management in Minneapolis. "If oil falls below $40, one would see pressure on overall earnings, not just the energy sector."

MSCI's all-country world equity index <.MIWD00000PUS> was last down 0.56 points, or 0.12 percent, at 465.73.

The Dow Jones Industrial Average <.DJI> was last down 49.88 points, or 0.23 percent, at 21,417.26. The S&P 500 <.SPX> was down 1.95 points, or 0.08 percent, at 2,435.08. The Nasdaq Composite <.IXIC> added 39.44 points, or 0.64 percent, to 6,227.47.

Europe's broad FTSEurofirst 300 index <.FTEU3> closed down 0.23 percent at 1,527.15.

The yield curve between five-year notes and 30-year bonds > flattened to 95.3 basis points, the narrowest since December 2007, as investors evaluated hawkish Federal Reserve policy and deteriorating inflation measures.

Five-year note yields >, which are highly sensitive to rate policy, rose to a four-week high of 1.80 percent on Tuesday.

Thirty-year bond yields >, which are largely driven by future expectations of growth and inflation, meanwhile dropped to 2.72 percent on Wednesday, the lowest since Nov. 9.

"I think the market may be pricing in a little higher odds of another rate hike before the end of the year, and that is helping drive some of the flattening," said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.

Hawkish comments from the Bank of England's chief economist Andy Haldane were also seen as hurting short-term bonds.

The dollar index <.DXY>, which measures the greenback against a basket of six major rivals, was last down 0.2 percent.

Gold prices rose after sliding to a five-week low in the previous session. Spot gold prices > were up $4.06, or 0.33 percent, at $1,246.87 an ounce.

(Additional reporting by Marc Jones and Sujata Rao in London and Karen Brettell and Richard Leong in New York; Editing by Nick Zieminski and Meredith Mazzilli)