Equity markets in retreat as US yields rise
European markets are trading lower following weakness on Wall Street, although energy stocks are proving to be a beacon of light as oil surges to an almost 14-month high.
Once again, rising bond yields are to blame in what is becoming an all too familiar story. Federal Reserve Chair Jerome Powell showed little to no concern over the rapid pace that bond yields have risen, giving the green light for an additional spike. The US 10-year treasury yield hit a fresh all-time high of 1.50%.
While Fed Chair Powell reiterated that the central bank wouldn’t be tightening policy anytime soon, he steered well clear of suggesting any form of intervention, dashing hopes that the Fed will step in to calm the bond market rout.
Stocks crashed in response to an underwhelming Fed response and spiking yields. This is because rising yields point to higher borrowing costs, which inevitably slow growth and recovery. The Nasdaq bore the brunt of the pain, closing more than 2% lower while also turning negative on the year. The sell-off has carried over into Europe where bourses are trading in the red and tech stocks are underperforming. Energy stocks are a bright spot in light of the OPEC+ decision to hold off on an output increase.
Covid concerns are refusing to be snuffed out. Following the World Health Organisation’s (WHO) warning that global covid cases are rising for the first time in seven weeks, several US states have reported an increase in hospitalisations. While this news isn’t alarming, it is adding to the downbeat mood.
Attention will now shift to the US Labour Department’s closely-watched jobs report. The overriding question here is whether the NFP report will help calm the markets or fuel inflation expectations? Powell insists the US economy still has a long way to go to reach the Fed’s full employment goal. However, an upbeat number could raise questions over this statement and risk sending bond yields higher and stocks lower still.
Expectations are for 182,000 jobs to have been added in February. A weaker-than-forecast ADP private payroll report earlier in the week and a decline in the employment sub-component of the ISM non-manufacturing report indicate that headline payrolls could fall short of forecasts.
FX – Dollar flies on Powell’s comments
The US dollar trades firmly higher on Friday hovering around a three-month peak on the back of Fed Powell’s reluctance to lower US bond yields. It’s worth noting that Powell’s stance towards yields stems from a position of confidence in the US economy. This combined with the steep sell-off in equities is US dollar positive.
US dollar strength has sent the euro packing; it trades sub 1.1950 hitting a fresh yearly low. Not even better-than-expected German factory orders managed to stir the bulls. German factory orders in January printed at 1.4%, up from -2.2% in the previous month and well ahead of the 0.7% expected. Momentum is not on the side of the EUR/USD, which trades below its 50, 100 and 200 SMA on the four-hour chart, although the RSI is heading into overbought territory. All eyes are now on the NFP for further impetus.
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