Declines in financial and energy shares weighed on US and European equity markets yesterday, while the US Treasury yield curve hit the narrowest in nearly a decade as investors evaluated hawkish Federal Reserve policy and deteriorating inflation measures.

The US S&P 500 financial sector was last down about 0.4 per cent while the European Stoxx Europe 600 Financial Services index was down 1.3 per cent. The financial sector fell as the US Treasury yield curve held near 10-year lows.

A drop in oil prices to near seven-month lows also put pressure on energy shares as investors discounted evidence that major producers are sticking to a deal to cut output. The US Nasdaq Composite bucked the trend, rising on gains in biotechnology stocks.

So far this year, oil has lost 20 per cent in value, its weakest performance for the first six months of the year since 1997. Brent crude was last down 43 cents, or 0.93 percent, at $45.59 a barrel. US crude was down 33 cents, or 0.76 per cent, at $43.18 per barrel.

“Oil has perhaps tempered some sentiment near-term,” said Terry Sandven, chief equity strategist at US 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 was last down 0.58 points or 0.12 per cent, at 465.71. The Dow Jones Industrial Average was last down 26.95 points, or 0.13 per cent, at 21,440.19. The S&P 500 was down 0.18 points, or 0.01 percent, at 2,436.85. The Nasdaq Composite added 33.13 points, or 0.54 per cent, to 6,221.17.

Europe’s broad FTSEurofirst 300 index dropped 0.23 per cent to 1,527.1.

The yield curve between five-year notes and 30-year bonds flattened to 96 basis points, the narrowest since December 2007. Five-year note yields, which are highly sensitive to rate policy, rose to a four-week high of 1.80 per cent on Tuesday.

Thirty-year bond yields, which are largely driven by future expectations of growth and inflation, meanwhile dropped to 2.72 per cent yesterday, the lowest since November 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 yesterday. The dollar edged higher against the yen after data showed US existing home sales posted a surprise increase in May, soothing some concerns about a real estate slowdown.