Yields dip, stocks recover
Traders are buying back into European equity markets as government bond yields are a little lower. At the start of the week, the US 10-year yield pushed above 1.80%, and that triggered a wave of selling in equities, in particular US stocks. The rally in yields indicates that the bond market is pricing-in a rate hike from the Federal Reserve in the next few months. In December, Fed members projected there would be three rate hikes in 2022, so that has been on trader’s minds recently. European indices are showing solid gains ,while US markets are now in the red despite getting off to a bullish start.
The US 10-year yield has dipped today even though inflation continues to rise. CPI increased from 6.8% to 7%, the highest mark in nearly 40 years. The sharp rise in the cost of living is one of the reasons why the US central bank has adopted a more hawkish position recently. Although it is worrying that costs are rising, at least the rate at which they are increasing seems to be cooling, after all, it was only a 0.2% rise.
Last week it was confirmed the unemployment rate fell to 3.9%, the lowest level since the pandemic began. The impressive rebound in the labour market is also why the Fed is moving towards lifting rates. There are some concerns in the markets the rate hikes from the Fed might tip the economy into recession, which is part of the reason why stocks suffered at the start of the week.
Even though the US CPI ticked higher, the dollar index has come under pressure. Recently, we have seen some disconnect between the US 10-year yield and the greenback, while today, there has been a slight decline in the yield and a big fall in the dollar. The fact the dollar is weaker today in the face of high inflation speaks volumes about the currency. It seems the greenback has fallen out of favour for now.
The slide in the US dollar has pushed up gold by 0.2%, which is a small move when you consider the greenback has fallen 0.45%. The broader risk-on sentiment in the markets – the rally in European stocks – is acting as a barrier to any further gains in gold. Industrial metals like silver and copper are enjoying bigger rallies as they are up 1.1% and 3% respectively.