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Opening Bell: Yield Rally Continues Ahead Of U.S. Inflation Data, Futures Waver

Published 04/12/2022, 08:56 AM
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  • Expected interest rate hike drives yields higher
  • Bitcoin remains under pressure
  • Oil recovers
  • Key Events

    US futures on the Dow Jones, S&P 500, NASDAQ 100 and Russell 2000 wavered on Tuesday while European markets traded lower as yields on the 10-year Treasury note pushed higher, hovering near 2.8% at time of publication. Markets are keenly awaiting the US CPI release due before the New York session opens today as any jump will likely confirm that the US Federal Reserve will raise rates 0.5% once again, in an effort to chase inflation lower and reduce recession risks.

    Both gold and the dollar continued to accelerate.

    Global Financial Affairs

    US contracts traded in the red earlier Tuesday but then recovered to move slightly into positive territory, though just barely for the Dow. This is a bit of a reversal vis-à-vis recent market activity when inflation worries weighed on growth stocks with high valuations. The current reversal is even more striking if the sell-off is attributed to the spike in Treasury yields. Therefore, we think this anomaly is a short-term correction within the trend.

    In Europe, the STOXX 600 slipped 1.2% at the open and the U.K.'s FTSE 100 shed 0.8% of value but both recovered slightly, although each remains in negative territory.

    Most of Asia finished the session in the red. The MSCI's broadest index of Asia Pacific excluding Japan retreated, taking its cue from the decline yesterday on Wall Street. Japan's Nikkei 225 slid 1.8%. China's Shanghai Composite was the outlier, climbing 1.46% on speculation of government policy easing on the technology sector after China ends the freeze on the approval of video games. As a result the tech sector there surged. Hong Kong's Hang Seng was the only other primary regional index in the green, gaining 0.52%.

    On Tuesday, the NASDAQ 100 dropped 2.35%, underperforming its peers and extending Friday's decline to 5.86%. The Russell 2000 led the four major indices, falling just 0.78%, about one-third of the drop seen in tech stocks.

    All S&P 500 sectors were in the red. Industrials lost 0.32%, Financials slipped 0.45%, and Materials declined 0.5%. Energy slumped 3% due to the ongoing coronavirus lockdown in China, which is the world's largest oil importer, as well as the decision by major economies, including the US and U.K., to tap into emergency reserves which will increase supply. Otherwise, Technology would have been the underperformer, slipping 2.52%.

    Yields on the 10-year Treasury note surged. Investors have been selling off bonds after the US Federal Reserve signaled sharper rate increases as well as balance-sheet reductions last week in an effort to slow the pace of rising inflation.

    10-year Treasuries Daily

    Yields continue along their rising channel, with yesterday's move forming a rising gap. That means that bond traders only wanted to sell at those levels with no buyers in sight. That's generally a bullish signal, with the gap's bottom providing support. However, after such a prolonged rise—mirroring the protracted bond selloff—it could be the prelude for a bond-buying dip, creating a falling gap, forming an Island Reversal. The most overstretched RSI since 2018 increases that risk.

    Rising yields are bearish for stocks because of the outlook for higher interest rates and because they siphon away capital from equities as higher yields are more attractive to investors.

    The dollar climbed for the ninth straight session, its longest winning streak since 2020, on expectations that the Fed will implement its fastest monetary tightening since 1994.

    Dollar Index Daily

    The greenback opened higher but has not been able to extend its advance, mired by Friday's Shooting Star that threatens to pull back after an H&S Continuation pattern has been verified with the follow-up breakout for its range.

    Gold climbed for the fourth straight day—despite the strengthening dollar. This is a sign of the times as the steepest path to higher interest rates in decades is coinciding with a deteriorating situation in Ukraine.

    Gold Daily

    We are not sure about the price's pattern. The rise coming through the vertex of the triangle could mean that the triangle's dynamics fizzled. As such, we're left with the maintenance of the underlying rising trend, as indicated by the increasing moving averages.

    Bitcoin rebounded from a five day slump within a seven day period but the cryptocurrency has started to slide again. Yesterday, the token fell below $40,000 for the first time in nearly a month, as the dollar gets more attractive. There are some concerns that this is a sign that the digital currency may now be considered a risk asset by some and no longer a safe haven.

    Bitcoin Daily

    The price found resistance by the 200 DMA and yesterday cut through the 50 and 100 DMA simultaneously. Moreover, the 100 DMA fell below the 50 DMA, demonstrating weakness. However, BTC/USD found support at the bottom of its rising channel for now. We still expect the price to fall to $30,000 and maybe lower.

    Oil rebounded on the expectation that China will soon ease its lockdown.

    Oil Daily

    From a technical perspective, it may be too late for WTI, which fell through the bottom of a Symmetrical Triangle reinforced by the 50 DMA. Even today's rebound found resistance below the triangle. We expect the price to retest the downtrend of a range since Mar 2021.

    Up Ahead

    • On Wednesday, the Bank of Canada announces its rate decision.
    • The EIA crude oil inventory report is published on Wednesday
    • On Thursday, the ECB announces its interest rate decision.

    Market Moves

    Stocks

    • The STOXX 600 fell 1.2%
    • Futures on the S&P 500 fell 0.4%
    • Futures on the NASDAQ 100 fell 0.3%
    • Futures on the Dow Jones Industrial Average fell 0.4%
    • The MSCI Asia Pacific Index fell 1.5%
    • The MSCI Emerging Markets Index fell 1.4%

    Currencies

    Bonds

    • The yield on 10-year Treasuries advanced four basis points to 2.82%
    • Germany's 10-year yield rose three basis points to 0.84%
    • Britain's 10-year yield increased three basis points to 1.87%

    Commodities

    • WTI crude jumped 3.6% to $97.69 a barrel
    • Brent crude rose 2.8% to $101.25 a barrel
    • Spot gold rose 0.2% to $1,957.19 an ounce

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