By Agency reporter

Friday, 11 Feb 2011

Stocks dropped, dragging a gauge of developing markets to its biggest loss since November, while the dollar strengthened as accelerating global inflation drives up borrowing costs.

Bloomberg News reported on Thursday that Portugal led an increase in the cost of insuring European government’s debt against default.

The MSCI Emerging Markets Index sank by two per cent in New York and the Standard & Poor’s 500 Index lost 0.6 per cent, just as Cisco Systems Incorporated and PepsiCo Incorporated fell on lower-than-estimated profit forecasts.

The dollar index added 0.8 per cent. Credit-default swaps on Portugal rose by 19 basis points as the country’s five-year bond yield rose by eight basis points. Rubber and cotton jumped to records.

United States 10-year and 30-year Treasury yields climbed to the highest levels since April this week, triggering concern that the stock-market rally is in jeopardy as bond returns become more attractive to investors and spur increases in consumer and corporate lending rates.

Freddie Mac said the 30-year fixed mortgage rate rose to 5.05 per cent last week, the highest since April. China lifted borrowing costs this week for the third time in four months and Korea is forecast to raise rates tomorrow.

“We’ve reached the point in which monetary policy is very relevant for asset-market performance,” said Mr. Michael Shaoul, whose $423.2m Marketfield Fund Limited beat 86 per cent of rivals in 2010.

“We’re in a very strong trend of improving data in the United States, where I see favourable monetary policy for at least 12 months. That’s not the case of emerging markets, where I believe you should be scaling back in countries which have clear inflationary pressures.

“It would not be a problem for the global economy, but they will go through a period of adjustment.”

Yields on 30-year US Treasuries, which rose to the highest in 10 months, slipped two basis points to 4.75 per cent before today’s auction, which completes three sales this week totaling $72bn.

Ten-year yields, which slipped from the highest since April, were up by two basis points at 3.69 per cent.

The S&P 500 slid for a second day after closing at its highest level since June 2008 on February 8. Cisco tumbled by 11 per cent as the largest provider of networking equipment’s gross margin missed analysts’ projections.

PepsiCo lost 1.1 per cent, after saying increases in commodity prices will be a “major headwind.” Activision Blizzard Incorporated, the largest video-game maker, plunged by 7.2 per cent as its earnings’ forecast fell short of estimates.

Source: Punch