- US markets shrug off rising yields
- Ukraine ceasefire optimism
- Disparity in FX
US markets shrug off rising yields
US stocks extended their gains on Tuesday, following a positive session in Europe. Optimism over a ceasefire in Ukraine continues to outweigh concerns over rising bond yields. The US 10-year yield has closed in on 2.4%, after its latest gains. But crucially, the yield curve has flattened with the rise in shorter-dated maturing bond yields rising faster than those at the longer end. This suggests that investors are expecting rate hikes to be front-loaded, which will probably cause a slowdown in economic activity, which, in turn, will call for looser monetary policy in the longer-term outlook. This explains why US stocks, especially the tech sector, has been able to rise so sharply off late.
Source: ThinkMarkets and TradingView.com
Ukraine ceasefire optimism
The drop in oil and gold prices and gains for European stocks all point to optimism about a potential ceasefire and hopefully end of the conflict in Ukraine. It looks like the markets have responded to the latest comments from Zelensky, suggesting Ukraine is ready to discuss commitment not to join NATO and that it is ready to discuss the status of Crimea and Donbass after the ceasefire. However, he also indicated that the nation would hold a referendum on the terms of any potential peace agreement. So, it may be too soon to be very optimistic about the end of the war in Ukraine.
Disparity in FX
The growing disparity between monetary policies of the Federal Reserve and Bank of Japan is plain to see and explains why we have seen the USD/JPY skyrocket past 120.00 in recent days. BoJ Governor Kuroda again reiterated that it is too early to talk about the BoJ ending its easing, including ETF purchases. This contrasts sharply to the Fed, with Powell raising the prospects of 50 bp hikes at one or more upcoming FOMC meetings, as well as the prospect that QT could start as early as in May.
Meanwhile, the Bank of England was a little less hawkish as had been expected, but the GBP/USD has today surged past 1.3200 anyway. The pound, Aussie and other commodity dollars have been in fine form of late, owing to the positive risk sentiment emitting from the stock markets. Pound traders will face a busy week, with the release of UK CPI due out Wednesday morning and the Annual Budget due for later in the day. UK PMIs will be released on Thursday, followed on Frida by the release of UK retail sales.
