After such a promising end to last week where the Dow rallied 200 points to a fresh record close, trading on Monday couldn’t have been more different. US stocks experienced a spectacular reversal and plummeted overnight, as the US 10-Year Treasury yield pushed relentlessly higher. Concerns are starting to enter the market that inflation could be catching up and higher interest rates could pour cold water on the bull run. As the US Treasury bond sell off depended, US treasury yields shot up to a peak of 2.73%, the highest level since 2014.The Dow dumped 177 points in its worst trading day so far this year and the S&P 500 dived 0.7%.
Equities less attractive is rising yields environment
Equities react to rising yields by selling off because higher treasury yields make borrowing more expensive. Higher costs of borrowing could potentially put those companies under pressure, which have been relying on cheap money to grow. Real Estate (NYSE:XLRE), Telecoms (NYSE:XTL) and Utilities (NYSE:XLU) were the worst performing sectors, these are typically the sectors that are negatively impacted by higher interest rates.
Meanwhile banks, which perform well in higher interest rate environments, were seen gaining ground on Monday.
The clear and sharp reversal in sentiment weighed on Asian equity indices overnight, meanwhile European futures are showing a sea of red as the risk off trade is seen pulling indices from their lofty levels.
Dollar gives back some gains ahead of Trump’s State of the Union address
Soaring yields helped support the dollar in its recovery mode and the greenback extended its gains reaching a 5-day high versus a basket of currencies in the previous session. However, whether the dollar will be able to keep hold of these gains and remain around 89.50 ahead of President Trump’s first State of the Union Address remains to be seen. With Trump setting out policy agenda ahead of the midterm elections, investors will be watching closely for comments relating to trade and protectionism. After a relatively watered-down Trump in Davos, it wouldn’t be surprising to see the fierier President Trump on home soil.
Brexit weighs on the pound, May’s future hangs by a thread (again)
Whilst the dollar pushed on northwards, the pound came under renewed pressure amid Brexit headlines and concerns over Prime Minister Theresa May’s leadership. Members of her own Conservative party have been vocal in their criticism of Theresa May and her lack of clarity over definitions for Brexit and the transition period. GBP/USD fell in the previous session, bouncing off support at $1.4025. Overnight, even after an increase in UK consumer confidence to the highest level in a year, sterling is looking decidedly softer. In the absence of further political headlines, investors will now look towards an appearance by Bank of England (BoE) Governor Mark Carney before the House of Lords Economic Committee. A break below $1.40 would be needed to indicate further selling.
German CPI & EZ Q4 GDP in focus
After a quiet start to the week for the eurozone, things look set to pick up in trading today. EUR/USD traded lower overnight and is selling off as it moves towards the European open, although the pair remains above the $1.2333 nadir reached in the US session. Rising US treasury yields, in addition to comments that ECB policy makers would prefer a gradual winding down of the quantitative easing program, rather than putting an end-date to it, have ensured that the pair remain under pressure pulling away from the three year high reached last week.
Today, euro traders will look towards German CPI and Eurozone Q4 GDP data. With sluggish inflation proving to be problematic for the ECB, investors will be keen to see if German CPI, which can act as a precursor for eurozone CPI tomorrow, is on the move closer to the ECB’s 2% target. CPI on a monthly basis is forecast to drop -0.6%, whilst the annualized reading is expected to stay constant at 1.7%. Meanwhile eurozone GDP is expected to have edged up to 2.7% on an annualized basis. Strong readings this morning could the euro the boost needed to push back above $1.24.
Opening calls
FTSE to open 48 points lower at 7623
DAX to open 92 points lower at 13,232
CAC to open 31 points lower at 5490