Treasuries curve flattens with 30-year yields dropping below 2%
We start this week in a risk off mode with Asian markets declining, as the last week surprise hawkish shift by US Federal Reserve is being processed by the investors. The Federal Reserve’s signal that interest rates hikes could come sooner is expected to dominate markets this week with the focus on the appearance of the Fed Chair Jerome Powell before Congress on Tuesday. Friday’s data on personal income and spending will also be important, as it contains PCE price index, the Fed’s favourite measure of inflation. In the UK, the bank of England meets on Thursday with no policy changes expected.
US stocks ended sharply lower on Friday with the Dow and S&P 500 recording their worst weekly performances since late October and late February respectively. Nasdaq Index also ended lower. Dow is trading around 33,290.08, S&P 500 is at 4,166.45 and Nasdaq at 14,030.38. The declines on Friday were marked by the slide in value stocks as well as a rally in the dollar and US government bonds. The US dollar hovered near 10-week high, following its biggest weekly advance in more than a year. DXY is currently at around 92.20. 10-year US Treasury yields fell to the lowest since early March at 1.40%, while the yields on 30-year bonds slid to 1.98% for the first time in more than four months. The yield curve was flattest since early February. St. Louis Fed President James Bullard’s comments on Friday fuelled the sell-off, as he noted that policy tightening was a “natural” response” to economic growth. This week focus will be on Jerome Powell’s testimony on Tuesday, as well Personal Income and Spending data on Friday.
European markets have opened lower this Monday with FTSE 100 trading 0.64% lower, DAX 0.47% lower and CAC 40 0.68% lower. DAX closed 1.8% lower on Friday with the biggest drop in June. The weekend French regional elections showed poor performance from Le Pen and Macron. There is a number of ECB speakers this week, including Lagarde on Monday. The message from ECB is expected to remain on the dovish side, highlighting that Europe is different from the US. Key data releases include European and UK PMI and German IFO. The BoE meeting on Thursday is not expected to produce any policy changes with a delay of the full economic reopening by a month seen as a reason for the continued cautious stance of the policy makers.
Asian stocks dropped this Monday with Japan’s Nikkei declining 3.3% and dipping below 28,000 for the first time in a month, while MSCI broadest index of Asia-Pacific shares outside of Japan fell 1%. Chinese stocks slid 0.4%, while Australia’s benchmark dropped 1.8%. The major driving force of these declines is last week’s Fed’s surprise hawkish shift.
Crude oil has climbed up for a second day underpinned by the strong demand and a pause in talks to revive the Iran nuclear deal. Brent Crude for August is around 0.5% higher at $73.86 and WTI for July is 0.6% at $72.05. Oil has been rising for the past four weeks amid optimism of the pace of global vaccinations and pick up in summer travel. Oil prices are also drawing support form the limited US output growth. Gold rebounded 0.6% to $1,773.12, but remained near the lowest levels, pressured by a stronger dollar.