Fed fears hit stocks as 10-year yields touch 2%

The bears are in control as we head into Wednesday trading as Treasury yields spike and oil rises to a 7-year high.

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• US treasury yields push higher, hurting demand for stocks
• Oil trades around a 7 year high
• UK CPI rises to 5.4% a near 30-year high

Global stocks suffered a bruising session on Tuesday, as fears of a more aggressive Federal Reserve hit demand for equities. Whilst US treasury yields rose to levels last seen pre-pandemic, the Nasdaq plunged 2.5% and the S&P500 closed 1.8% lower. In Europe, the picture was similarly depressing with the DAX 40 closing down 1%. The FTSE 100 fared better than its peers losing 0.6% of its value, supported by gains in heavyweight oil majors.

The surge in US treasury yields has continued overnight as investors carry on fretting over the pace at which the Fed will move towards policy normalisation in 2022, to fight high inflation. According to the CME Fed watch tool, the market is now pricing in a 90% probability of a 25-basis point rate hike as soon as March. This is up from 46% just a month ago, so some big adjustment in market pricing is almost inevitable.

Oil to $100?

We continue to highlight oil because the rally just keeps going! Surging oil prices have underscored concerns over rising inflation. Brent crude oil rose to a 7-year high yesterday as geopolitical tensions in the Middle East and Russia added to ongoing concerns over tight supply, with OPEC+ struggling to ramp up production. Today, oil prices remain elevated as an outage on a pipeline from Iraq to Turkey intensifies supply concerns. Given the worrisome geopolitical picture and OPEC+ supply constraints, oil prices are likely to remain well supported over the coming months, though the short-term trend has become very over-extended. 

UK CPI rises

The pound is on the rise after UK CPI inflation jumped to 5.4% in December, up from 5.1% in November and well ahead of the 5.2% forecast. Meanwhile, core inflation (which strips out more volatile items such as food and fuel) rose to 4.2% up from 4% in November and above estimates of 3.9%. The jump in inflation to an almost 3-decade high comes hot on the heels of strong jobs data yesterday, as unemployment fell to the lowest level since the start of the pandemic and job vacancies rose to a record 1.25 million. 

A strong British labour market and surging inflation is prompting bets that the BoE could hike interest rates again in February, lifting the pound. GBP/USD has picked up off the weekly low and is attempting to re-take 1.36.

US bank earnings continue 

US banks have so far made for a disappointing show. Whilst JP Morgan and Citigroup disappointed on Friday, Goldman Sachs also dropped the ball yesterday, missing earnings forecasts. Weak trading activity and surging costs to attract top talent overshadowed a stellar performance in M&A activity. Today Morgan Stanley and Bank of America are under the spotlight. The latter put in a strong performance across 2021 and could do so again, given its high sensitivity to interest rates rises.