Stocks in Europe are lower in early trade on Tuesday after Asian equity markets apparently turned lower on rising bond yields. The yield on US 10-year paper rose above 1.85 per cent on Monday, albeit on thin trade due to the US holiday, whilst the 2-year yield moved beyond 1.05 per cent, a 2-year high. The Bank of Japan revised up its inflation forecast and said risks to prices were “generally balanced", rather than skewed to downside. European rate markets are also on the move with the German 10-year bund flirting with turning positive this morning. UK employment data looked encouraging as employees on payroll hit a record high, but big decline in self-employment means total employment still way below pre-pandemic, whilst falling real wages in the face of inflation is a problem for growth.
The FTSE 100 peeled back from yesterday’s post-pandemic high above 7,600, rocking by around 0.6 per cent to just under 7,550, not quite testing yesterday’s low of 7,543. Bourses in mainland Europe were weaker still, declining by around 1 per cent in the early part of the session. US futures are looking lower with the S&P 500 implied cash open hovering around Friday’s lows around 4,616, just on the 38.2 per cent retracement support and a little north of the 100-day moving average around 4,580.
The key thing to watch today as US traders return to their desks following the MLK holiday is whether the rout in bonds continues, or moderates. It’s not been a straight line to here this year and we can expect lurches and retracements as markets adjust to the dynamics of inflation and Fed policy expectations. Comments from the Fed’s Waller around hiking by 50bps in March (saying he didn’t favour doing this but suggesting it had been talked about is enough) has got the market thinking the Fed might catch up quicker than expected. Reading the commentary from various Fed officials and Jay Powell’s remarks during his Senate confirmation hearing, the FOMC thinks the biggest risk to the economy – and crucially therefore to the labour market – is inflation.
Rising yields seem to be lifting the USD. GBPUSD has declined in the last couple of sessions following Thursday’s high above 1.37, its best level since the end of October. Flat this morning, the pair is clinging to yesterday’s low around 1.3640. The dollar index continues to make good ground after bouncing off its 100-day moving average.
Oil prices jumped to their highest since 2014, with WTI above $85 and Brent at nearly $88. Concerns around supply after Yemen's Houthi group attacked oil tankers in the United Arab Emirates are certainly supportive as supply remains tight anyway. We could also attribute a certain amount of geopolitical risk premium from the situation on the Ukraine-Russia border. Of course, this rally to previous peaks has plenty talking about $100 oil again... not so sure this can last but a sustained break above the $85.60 highs could see a breakout to $90. Speculative positioning is not very stretched on the long side, though has jumped in the last week, so could have room there for upside. GS out with forecasts today saying Brent could hit $96 in 2022 and $105 in 2023.
Meanwhile… just to make sure you know who’s in charge… a virtual Davos World Economic Forum was opened by Xi Jinping yesterday. “It is my distinct honour and great privilege to introduce His Excellency Xi Jinping, president of the People’s Republic of China, to open the Davos Agenda” Klaus Schwab fawned. Meanwhile, SPAC shill in chief Chamath Palihapitiya said “nobody cares” about human rights abuses against the Uyghurs in China. “Of all the things that I care about, it is below my line,” he said in a podcast interview. Classy.
Neil Wilson is the Chief Market Analyst at markets.com