US Yields Rise, FTSE Slips, Powell in Focus

European bourses are trading on the back foot following a weak handover from Wall Street and a sustained sell-off in Asia. Bond yield concerns are back to haunt investors after yields on the 10-year treasury spiked to 1.49% overnight.

The market hasn’t been able to shake off rising bond yield concerns despite reassurance from Federal Reserve Chair Jerome Powell that any tightening in policy was still a long way off. Whilst at 1.5% bond yields are far from elevated compared to pre-pandemic levels, it is the pace at which they arrived at this level that is catching the attention not just of investors but also some Fed speakers.

Attention today is squarely on Fed Chair Powell when he speaks later. Up to now, Powell has considered the rise in yields and inflation expectations a sign of better economic prospects. Any sense from the Chief himself that the Fed is not comfortable with the latest bond market developments could give way to intervention bets ahead of next week’s FOMC. Under this scenario, the US dollar could come under pressure and stocks could get their mojo back.

However, for now, bond market antics are boosting the US dollar, which in turn is dragging commodity prices sharply lower. As a result, miners are being hammered and the FTSE is underperforming its European peers, by a considerable amount. The post-budget buzz of yesterday, which saw the FTSE close almost 1% higher, has been completely wiped out.

USD strength holds, EZ retail sales disappoint

King dollar is extending its reign for a second straight session, supported by the spike in treasury yields. A spectacular ISM services PMI reading of 60.8 (versus 58.8 expected) completely overshadowed weakness in the jobs market, boosting inflation expectations and sparking a sell-off in bonds.

As a result of US dollar strength and disappointing Eurozone retail sales, EUR/USD is extending its bearish descent. Eurozone retail sales for January dived -5.9% MoM – a sharp decline from December’s 1.8% and significantly below forecasts of -1.1%. On an annual basis, sales tumbled -6.4%, well below December’s 0.9% and the -1.2% forecast.

EUR/USD trades with a mildly bearish bias, traders may wait for a move below 1.20, the key psychological level, before placing any aggressive bearish bets. On the flip side, a move over 1.21 and the 20 SMA would be needed to convince more bulls to jump in.

As the dust settles after the Chancellor’s big-spending budget, the pound has failed to hold onto gains versus the greenback and is eyeing 1.39, although gains versus the euro have been maintained. The post-budget moves in sterling have been muted and this is most likely owing to the fact that the budget contained few surprises. Long gone are the days of budget secrecy until the big event. Most of Rishi Sunak’s moves were pre-trailed.