Stocks strengthen; yields, dollar rise on Fed taper talk

By Matt Scuffham

NEW YORK (Reuters) -Global stock markets strengthened on Tuesday, hovering close to record highs, while U.S. Treasury yields rose to their highest levels since mid-July, spurred by Federal Reserve tapering talk.

Sentiment was boosted by the U.S. Senate passing a $1 trillion bipartisan infrastructure bill that could provide the United States with its biggest investment in decades in roads, bridges, airports and waterways.

That helped the Dow Jones Industrial Average and S&P 500 close at record highs.

The Dow Jones Industrial Average rose 162.82 points, or 0.46%, to 35,264.67, the S&P 500 gained 4.4 points, or 0.10%, to 4,436.75 and the Nasdaq Composite dropped 72.09 points, or 0.49%, to 14,788.09.

European shares extended gains for a seventh straight session as investors took comfort from strong earnings reports and economic recovery prospect.

The pan-European STOXX 600 index rose 0.35%.

MSCI's gauge of stocks across the globe gained 0.12%, trading just off the record high it hit last week.

"Domestically and globally, we're seeing economies recovering from the pandemic. It's a good period for investing," said Tim Ghriskey, chief investment strategist at Inverness Counsel in New York.

The dollar scaled a four-month high versus the euro as investors looked ahead to U.S. inflation numbers on Wednesday for indications of when the world's largest economy might start to withdraw stimulus.

Activity, meanwhile, was heating up in bond markets.

Indications in recent days of an improving labor market have prompted investors to rethink the outlook for U.S. monetary policy, halting recent sharp falls in both U.S. and European bond yields.

Speculation is mounting that Fed Chair Jerome Powell could signal the U.S. central bank is ready to start easing monetary support in a speech to be delivered at the annual Jackson Hole, Wyoming, conference of central bankers.

"Expectations have clearly shifted for Fed Chair Powell to turn hawkish at Jackson Hole and make a formal announcement on tapering asset purchases at the September FOMC meeting," said Ed Moya, senior market analyst at OANDA in New York, using the acronym for the Fed's policy-setting Federal Open Market Committee.

U.S. Treasury yields were also boosted by news that the infrastructure bill had been passed, while an auction of three-year notes produced strong results. The benchmark 10-year yield hit 1.349%, its highest level since July 15.

Benchmark 10-year notes last fell 9/32 in price to yield 1.3473%, from 1.317% late on Monday.

Adding fuel to the debate, two Fed officials said on Monday that, while the labor market still has room for improvement, inflation is already at a level that could satisfy one leg of a key test for the beginning of interest rate hikes.

Data on Monday showed that U.S. job openings shot up to a fresh record high in June and hiring also increased.

That followed Friday's nonfarm payroll report showing jobs increased by a larger-than-anticipated 943,000 in July.

While signs of economic recovery in the United States are reviving reflation trade bets, investors remain wary of the lingering risks posed by COVID-19.

China on Monday reported more COVID-19 infections in what seems to be its most severe resurgence of the disease since mid-2020, as some cities added rounds of mass testing in a bid to stamp out infections.

MSCI's broadest index of Asia-Pacific shares outside Japan added 0.4% after trading much of the day in the red as worries weighed about the spread of the Delta variant.

With tapering expectations gaining traction, the dollar extended gains made on Friday and Monday.

The dollar index rose 0.106%, with the euro down 0.17% to $1.1717.

Oil prices rose 3% on Tuesday, rebounding from recent losses on signs of rising demand in the United States [O/R]

U.S. crude oil futures settled at $68.29 per barrel, up $1.81 or 2.7%. Brent crude futures settled at $70.63 per barrel, up $1.59 or 2.3%.

U.S. gold futures settled up 0.3% at $1,731.70.

(Additional reporting by Paulina Duran in Sydney Editing by Jonathan Oatis and Mark Heinrich)

FILE PHOTO: A trader works on the floor of the New York Stock Exchange (NYSE) in New York City, New York, U.S., July 28, 2021. REUTERS/Andrew Kelly/File Photo

The German share price index DAX graph is pictured at the stock exchange in Frankfurt, Germany August 9, 2021. REUTERS/Staff

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