We’re in one of those strong dollar plus firmer Treasury yields means weaker stocks and higher volatility paradigms. Basic resources, autos and financials led the declines early doors this morning as the major European indices fell sharply after a rough session on Wall Street. Considerations about escalation in the Middle East are meeting with concerns about when the Federal Reserve might start cutting rates, which has sent the dollar to a five-month high. As such
The FTSE 100 is down 1.3 per cent this morning, after a weak day yesterday well where it dipped 0.38 per cent on the back of softer oil prices. It’s a similar scene across the rest of Europe with shares in Frankfurt down 1.4 per cent and the Cac down 1.3 per cent. This has all come after a serious wobble on Wall Street where the S&P 500 decline 1.2 per cent and the Dow almost erase its entire YTD gains to close at 37,735, having been close to 40,000 at the start of the month. The Nasdaq Composite declined 1.8 per cent but like the broader market is still up around 6 per cent year-to-date. Tesla was down more than 5 per cent and the rest of the Magnificent 7 were all down by around 2 per cent or so. Tesla is now down 35 per cent this year.
Treasury yields and the US dollar rallied to fresh year-to-date highs as US retail sales beat expectations. The 10-year yield trades above 4.63 per cent, with the two-year knocking on 5 per cent again. These are levels last seen in November, when the ‘higher for longer’ message was cutting through to markets before the ‘Powell Pivot’ in mid-December. Gold also snapped back smartly despite the 10-year Treasury Inflation Protected Securities (Tips) hitting 2.2 per cent. Morgan Stanley’s Mike Wilson said the 4.35-4.40 per cent on the 10-year Treasury yield is a “key level for stock valuations”. He adds: “Last week it was breached decisively to the upside [and] multiples may now face headwinds if rates rise further.”
China’s GDP expansion in the first quarter was better than expected, but retail sales and industrial production was softer than expected. On the Middle East – there are always geopolitical concerns…this is the noise. Geopolitics never stopped the S&P 500 making another record high. But for traders the geopolitics combined with some fresh macro uncertainty about what the central banks are going to do next, it means more volatility in the near term.
New York Federal Reserve president John Williams said rate cuts will likely start this year, though Mary Daly, president of the San Francisco Fed, said there is no urgency to cut: “The worst thing we can do right now is act urgently when urgency isn’t necessary.”
Fed chair Jerome Powell and Bank of England governor Andrew Bailey are due to speak later. This offers the Fed chair in particular the chance to offer some clear signalling about the FOMC’s reaction function in the wake of the repricing in Treasury markets since the hot inflation data last week and yesterday’s retail sales numbers.
Elsewhere, the pound hit a fresh five-month low this morning as UK employment data was mixed – unemployment rose, but wage growth remains strong. Fixes the sense that the BoE should be cutting soon but cautiously, but positive real earnings growth should be a reason to be cheerful (as long as inflation remains under control).
The Trader is written by Neil Wilson, chief market analyst at Finalto
