Opening Bell: Spiking Yields Pressure Futures, Global Stocks; Dollar Keeps Rising
2022.04.18 13:50
- Treasury yields surpass 3-year highs
- 10:2 yield curve flattens
- China warns of economic challenges, offsetting faster growth
Key Events
A selloff in Treasuries on Monday, dragged U.S. futures lower. All four contracts—for the S&P 500, Dow Jones, NASDAQ and Russell 2000—were in the red to start the trading week. Markets in Europe, as well as those in Australia and Hong Kong are closed for Easter Monday.
Oil slipped on fears of slowing demand out of China.
Global Financial Affairs
Though all US futures are currently trading lower, contracts on the NASDAQ 100 and the Russell 2000 are underperforming. That’s because big tech companies and small-cap domestic firms are the most sensitive to higher interest rates. Conversely, non-tech mega-cap multinational businesses listed on the Dow provide the best protection from spiking inflation.
Today’s Treasury selloff comes ahead of an array of speeches this week by Federal Reserve officials, who may provide investors with fresh clues regarding the central bank’s path to higher interest rates. The same sentiment was apparent today from Asian traders.
Asian equities opened lower on Monday as traders closed positions when Chinese officials offset higher than expected economic growth by warning of “significant challenges ahead” despite the stronger-than-anticipated GDP.
Also weighing on investor sentiment in Asia, is the first COVID fatality from the current outbreak in China’s largest city and financial hub, Shanghai, even as the case count remains elevated.
Though the world’s second-largest economy posted 4.8% Q1 growth despite harsh pandemic lockdowns, China’s National Bureau of Statistics poured cold water over the heating economy, warning:
“We must be aware that with the domestic and international environment becoming increasingly complicated and uncertain, economic development is facing significant difficulties and challenges.”
The Shanghai Composite declined by 0.5%, but Japan’s Nikkei 225 was the regional underperformer, finishing -1.1%. Technology stocks slumped on the prospect of higher rates, an outlook that grew worse as Treasury yields rose.
The benchmark 10-year Treasury yield neared 2.9% today, for the first time in more than three years—approaching our secondary target of a few weeks ago—as investors continue to price in higher interest rates, a likely response to higher inflation.
While the accelerating yield on the 10-year may ease concerns of a yield curve inversion between the benchmark note and the 2-year Treasury, seen by many as a leading indicator of an upcoming recession, the yield spread be is still flattening.
US 10Y:2Y Yield Spread Weekly
Demand for shorter dated bonds rises more quickly as investors anticipate upcoming higher rates, rendering current Treasury yields unattractive. Higher rates also pressure equities as money becomes scarce, and higher, fixed yields provide an attractive alternative to the uncertainty of equities.
The dollar rose after closing flat on Friday in thin trading. It climbed for a third week to its highest level since Mar. 25, 2020, when the greenback gained because of its haven status as markets crashed during the first COVID wave. Another 2% rise would test the Mar. 19, 2020 high, the USD’s highest level since December 2016. Beyond that, an additional 0.9% would bring the global reserve currency to heights not seen since the end of 2002 after the dollar peaked as a safe haven following the dot-com crash.
Dollar Monthly Chart
The Dollar Index may be completing a massive H&S Continuation pattern, supported by the even larger H&S bottom between 2003 and 2014. If the pattern completes and follows through, we expect the dollar to head back to the 120 area, a position not seen for the USD since 2001, when the dollar peaked after the euro was launched.
Gold rose, extending a three-week streak, for the first time since February, intra-week.
Gold Weekly
In terms of weekly pricing, the yellow metal reached the highest level since late August 2020, after peaking from that all-time high, the first one since 2011.
Bitcoin fell for a second day, tracking risk assets, not safe havens.
BTC/USD Daily
The most popular cryptocurrency by market cap completed a bearish pennant, setting it to retest the channel bottom on its way down to test the $30K before it potentially falls even lower.
Oil retreated as investors cashed out after a three-day winning streak for the first time since Mar. 21, but natural gas kept gains after opening higher on the threat of an E.U. embargo on Russian energy.
Up Ahead
- IMF spring meetings begin Monday
- St. Louis Fed President James Bullard to speak on Monday
- Chicago Fed President Charles Evans to speak Tuesday
- Fed Chair Jerome Powell and ECB President Christine Lagarde discuss the global economy at Thursday’s IMF event.
- Manufacturing PMIs from the Eurozone, France, Germany and the UK print on Friday
Market Moves
- The MSCI Asia Pacific Index fell 0.4%
- The MSCI Emerging Markets Index fell 0.4%
- The Japanese yen was little changed at 126.48 per dollar
- The British pound fell 0.3% to $1.3026
Bonds
- The yield on Germany’s 10-year bond dropped 0.06%
Commodities
- Brent crude was little changed
- Spot gold rose 0.6% to $1,989.65 an ounce
