Bulls enter the fold as fears fade, dollar jumps
Equity markets are moving higher today as traders are less fearful of the possibility of China slowing down, it also helps that government bond yields have dipped. Bargain hunters have stepped into the fold today as they have swooped in to snap up relatively cheap stocks. For much of the past 18 months, stock markets were driven higher by the talk of pent-up demand being unleashed as economies reopen, as well as ultra-loose monetary policy. We have seen a remarkable bounce back from the pandemic, but now it seems the recovery is running out of steam. Even if China’s growth rate this year isn’t as high as initially predicted, it will still probably be a high single digit percentage - so still impressive.
Yesterday, the US 10-year yield hit 1.56%, a three month high, due to speculation the Fed might look to tighten its policy in the months ahead. We have seen bond yields retrace today but the chatter about tapering is likely to resurface in the near-term when you consider the language used at last week’s Fed meeting. The lull in yields today has also acted as a green light to the equity bulls. Historically, the prospect of higher rates has tended to hit stocks, but after a while, the markets get used to the idea, and it causes less volatility. The NASDAQ is the outperformer of the US indices today, but then again, it suffered the largest decline yesterday.
WTI and Brent crude are down on the session as profit taking continues. Yesterday, the energy eked out a 34-month high, but it retreated from its peak as economists lowered their growth forecasts for China. The country is one of the biggest oil importers in the world, so the cautionary predictions from economists promoted dealers to book profits. The losses seen today are small when compared with the strong rally in oil over the past week, so that says a lot about the state of the energy market.
The US dollar index has racked up a new 10-month high amid talk the Fed might start tapering its stimulus scheme in the next few months. For some time, it seemed as if the Fed and the Bank of England were both edging towards tightening policy, but now the impression is the Fed are more likely to act first, so that is adding to the greenback’s positive run. GBP/USD has tumbled to a nine month low. The pound is still suffering from Andrew Bailey’s comments on Monday, where the central banker warned the economy is not ready for a rate rise.