After yesterday’s speech by Janet Yellen which signaled a path of steady interest rate increases and was perceived as hawkish, the dollar rebounded, Asian shares slipped and government bond yields jumped to multi-week highs on Thursday.
European, Asian stocks and US equity futures all decline together with commodity metals while oil rises on the API reported drop in crude inventories. The euro rebounded as investors look to Mario Draghi to address quickening inflation that make his stimulative policies look increasingly out of sync, even if the market is confident the ECB won’t make any changes to its policy today. That said the ECB may struggle to downplay the recent spike in Eurozone inflation.
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In markets, the main focus for the past 24 hours has been once again on the fairly large moves across rates and FX, albeit moves which largely ended up being a reversal of the previous day’s price action. 10y Treasury yields closed a shade over 10bps higher yesterday at 2.430% while the USD index rebounded +0.60% and finished higher for the first time in over a week. Those moves were given a late boost by comments from Fed Chair Yellen who said that “it is fair to say the economy is near maximum employment and inflation is moving toward our goalâ€. She also said that while “it makes sense to gradually reduce the level of monetary policy support†the actual timing of the next Fed rate hike “will depend on how the economy actually evolves over coming monthsâ€. So a fairly straight bat approach.
As a result, the dollar gained almost one percent from Thursday’s lows against a basket of currencies, yields climbed in Europe, catching up with Treasuries which sold off yesterday after Fed chair Janet Yellen said the American economy is strong enough to warrant higher interest rates, bringing the ECB’s quantitative easing into sharper relief as policymakers led by Draghi meet today. Stocks fell, led lower by real estate after an indicator of U.K. house prices fell for the first time in five months in December as values slumped in London.Â
Yellen’s hawkishness appeared to be wearing off on Thursday, though, as investors, looking for further details on Trump’s plans to boost growth, remained cautious before the President-elect’s inauguration on Friday. As a reminder, Yellen will speak again later on Thursday, after European markets close, about the economic outlook and monetary policy.
The ECB is set to meet as the euro recovered some of the ground it lost overnight, but with no policy changes expected. However, hints of disagreements among the region’s monetary guardians could ruffle markets.
European stocks opened a tad higher with some big moves in single stocks, as Zodiac Aerospace surged following a takeover offer, and Moneysupermarket.com jumped after it reported strong results.
Asian shares edged down 0.2 percent, knocked back by the dollar. Bucking the trend of weaker Asian shares, Japan’s Nikkei stock index ended up 0.9 percent, helped by weaker yen.
“Of all the speakers we’re getting, either from Davos or from less ostentatious spots, the one I’m going to listen to most for now will probably still be Janet Yellen,” Societe Generale’s currency strategist Kit Juckes said cited by Reuters. “As the U.S. economy approaches full employment, as wages rise but inflation rises nearly as quickly, how hawkish the Fed dares to be will determine how much the dollar rises.”
Euro zone government bonds were still moving in the slipstream of Yellen’s speech with benchmark German bond yields spiking to one-month highs after U.S. equivalents rose to their highest since Jan. 9. Yields on 10-year German bunds jumped 3 basis points to 0.38 percent by 9:40 a.m. in London. Treasury yields were steady at 2.43 percent.
As Reuters adds, and as we previewed overnight, earlier in Asia, short-term funding costs in China shot to their highest in nearly 10 years on fears that liquidity was tightening heading into the Lunar New Year holidays at the end of this month.”The market is typically short of liquidity ahead of the Lunar New Year,” said Gu Weiyong, chief investment officer at bond-focused hedge fund Ucom Investment Co, adding that a cash injection by the central bank was insufficient.
Crude oil prices regained some ground lost in the previous session when the dollar strengthened as investors turned their attention to upcoming government data on U.S. inventories. A stronger dollar makes dollar-denominated commodities more expensive for those holding other currencies. U.S. crude added 0.8 percent to $51.50 per barrel, after shedding 2.67% on Wednesday. Brent crude rose 0.7 percent to $54.32 after slipping 2.79%.
Market Snapshot
- S&P 500 futures down 0.2% to 2263
- Stoxx 600 down 0.3% to 362
- FTSE 100 down 0.6% to 7206
- DAX down 0.1% to 11585
- German 10Yr yield up 2bps to 0.38%
- Italian 10Yr yield up 3bps to 1.99%
- Spanish 10Yr yield up 3bps to 1.48%
- S&P GSCI Index up 0.2% to 395.9
- MSCI Asia Pacific down 0.2% to 140
- Nikkei 225 up 0.9% to 19072
- Hang Seng down 0.2% to 23050
- Shanghai Composite down 0.4% to 3101
- S&P/ASX 200 up 0.2% to 5692
- US 10-yr yield down less than 1bp to 2.42%
- Dollar Index up 0.18% to 101.11
- WTI Crude futures up 0.6% to $51.40
- Brent Futures up 0.7% to $54.28
- Gold spot down less than 0.1% to $1,204
- Silver spot down 0.5% to $16.98
