The US Stock Market Reversed Gains And Bond Yields

Market movers today

In the euro area, a key release is the ECB minutes from the January meeting. No changes were announced at the meeting but we will look for the attention the (in hindsight ) small sell-off and exchange rate volatility had at the time of the meeting. Also, we will be looking for any indications of when the ECB could revisit forward guidance.

In Germany, we will get numbers for the IFO expectations, which we believe will show a further decline to 107.9, possibly influenced by some turbulent weeks in the stock markets.

In the UK, we will get more details about what drove economic growth in Q4 with the second release of GDP growth.

Also in the UK, Theresa May and her most senior cabinet ministers will meet to try and agree on a Brexit trade deal that they want with the EU in the post -Brexit future. This will be a litmus test for the UK Prime Minister as her cabinet still appears to be divided between those who want a soft and a hard Brexit .

Overnight , we will get January inflation figures for Japan. Inflation has been ticking upwards over the past year but it has been driven primarily by energy prices. The underlying price pressure in Japan remains very low. Recently, according to IHS Markit data, prices charged by both the service and the manufacturing sector have risen. It will be interesting to see whether these figures will also induce higher consumer prices.

Selected market news

The Fed minutes of the January FOMC meeting released last night have set the tone in financial markets over night. The minutes revealed that the FOMC has become more upbeat on near-term growth compared to December, seeing bigger potential for the tax reform to boost growth than estimated previously and the strong rises in equity prices at the beginning of the year (the meeting took place before the equity market correction began in early February). However, FOMC members expected inflation to rise this year, despite the still muted inflation and wage growth. In our view, the minutes did not suggest the Fed will be inclined to raise its rate hike expectations to four from three hikes this year. We expect the Fed to hike the interest rate at the next meeting in March. At this meeting it will be interesting to see how the Fed factors in the additional fiscal loosening from the budget deal and higher wage and inflation data. We may already get some signals when new Fed Chair Jerome Powell testifies on the central bank’s semi-annual report on monetary policy and the economy in the US congress on 28 February.

On the back of the minutes, the US stock market reversed gains and bond yields . The S&P 500 Index ended the day down 0.6% after being up as much as 1.2% earlier. The yield on 10- year Treasuries rose to 2.94%, which is the highest in four years. This morning, Asian markets are following suit , with the Nikkei down over 1%. The only exception is the Chinese stock markets, which is reopening after a five-day break for the Chinese Lunar New Year. Most Asian currencies are also losing ground against the USD, except for the Japanese yen, which is seeing support from the higher risk aversion in the market .