Global bond yields hit fresh highs; stocks retreat
The Fed’s new message, which sparked fears that inflation could be tough to contain, and hence could require faster-than-expected rate hikes during the year, continued to weigh on market sentiment on Monday, elevating global bond yields to fresh highs.
A couple of Fed policymakers have already urged the need to move towards normalization ahead of Powell’s testimony before the Senate Banking committee on Tuesday, making four rate hikes an increasingly likely scenario this year. As a result, investors withdrew funds from the safe-haven bond markets, sending the 10-year Treasury yield up to 1.80%, the highest in a year.
Global stock markets came under pressure too as the massive liquidity, which has been feeding the record rally the past two years was about to vanish soon, with energy and financials being the only sectors to survive with minimal gains in the pan-European STOXX 600 index. Unlike its other European counterparts, the British FTSE 100 has barely lost ground, hovering around last week’s one-year high.
Wall Street could join the bearish mood later in the day, according to US futures. Note that the Nasdaq 100 has already slid below its 100-day simple moving average (SMA), opening the door for the 15,000 round level. The S&P 500 is also eyeing the key support area at 4,600 following the close below its shorter-term SMAs, whereas the soft decline in the Dow Jones has yet to create any caution.
The Fed has been carefully guiding investors towards monetary tightening since the end of summer. Hence, the removal of stimulus is not something new to investors’ ears. The puzzling part of the story is whether the Fed will manage to contain inflation without raising interest rates above 2.0%. Despite the drop in the unemployment rate in December, the elevated debt levels, the persisting pandemic supply jitters, and inflation pressures could leave the US economy vulnerable to a faster stimulus withdrawal. Hence, fluctuations in growth concerns could make the Fed’s mission a challenging one.
Yen best performer; European currencies, commodities in doldrums
Turning to the FX space, the Japanese yen is the best performer so far in the day, probably on the back of risk aversion, as the BoJ is not expected to abandon its accommodative stance anytime soon. Dollar/yen has erased Friday’s rally, retreating into the 115.45 – 115.25 restrictive region. The Swiss franc could not follow suit as a slight increase in the SNB’s sight deposits raised speculation that the ECB’s muted stance could motivate more intervention from the SNB. Dollar/swissie and euro/swissie are currently in a bull run, trading around three-week highs.
In other major pairs, pound/dollar turned red after touching the 1.3600 psychological mark, while euro/dollar is currently looking for support around the 1.1280 key level after giving up Friday’s pickup around the 50-day MA.
The pullback in the euro helped the dollar index to bounce back above the 96.00 mark.
In commodities, oil futures are trading slightly weaker for the second consecutive session. Gold is capped by the $1,800/once mark.