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High yields sour equity sentiment

European equity markets had a good run yesterday following the bullish session in the US on Wednesday.  

In the past 48 hours we heard from the Federal Reserve and Bank of England. Bth central banks kept their extremely loose monetary policies in place. Neither institutions are in a rush to lift interest rates, so that laid the foundations for the rally. Yesterday, the DAX 30 saw a new record high, with modest gains on the FTSE 100 and the CAC 40. 

It was a different story on Wall Street yesterday, as the US 10-year yield hit a 14-month high of 1.75%. Tech stocks sold off heavily due to the jump in yields. Tech companies are less popular with traders at the moment, as funds are being redirected to lockdown-stricken industries like travel and hospitality. The Dow Jones, which has a relatively small exposure to the technology sector, fell by 0.46%, while the tech-heavy NASDAQ dropped by over 3%.

On Wednesday night, Jerome Powell, the chairman of the Fed, lifted the country’s growth forecast for 2021. The US’s economic rebound is one of the strongest seen in the world’s major economies. That being said, we saw disappointing labour data from the US yesterday. The jobless claims reading jumped to a four-week high of 770,000, despite economists predicting a fall to 700,000. The hiccup in the labour data suggests the recovery won't be that smooth.

There was also some positive economic data that caught traders by surprise too. The Philadelphia Fed report for March surged to 51.8, the highest reading in almost 50 years. The new orders component of the update more than doubled to 50.9, and the prices paid metric jumped to its highest reading since 1980. This speaks to the inflationary pressure on goods that Mr Powell mentioned on Wednesday.

Traders in Asia were spooked by the declines in the US, hence the selling pressure in Asia. The Bank of Japan made a reference that the ETF purchase programme will only focus on Topix-linked ETFs, which hurt the Nikkei. European stocks are set to open lower. 

The US dollar rebounded yesterday as the increase in yields propped up the dollar. Jerome Powell made it clear the Fed has no intention of hiking rates in the foreseeable future, but at the same time, the US central bank would be considered one of the front runners when it comes to who will hike first. Gold was knocked yesterday as the jump in the greenback took the shine off the metal. Oil was battered as fears about European demand – connected to the halting of the AstraZeneca-Oxford vaccine – weighed on sentiment. The energy is traded in dollars so the firmer greenback was a factor too. The aggressive move to the downside in oil was accelerated as speculators had built up their largest long position of CME-listed derivatives since 2018.                             

UK public sector net borrowing at 7am (UK time) is predicted to jump from £8.75 billion in January to £21 billion in February. Governments around the world are borrowing eye-watering amounts to keep their respective economies afloat as the lockdowns have stifled growth, and the UK is no different. Earlier this month, chancellor Rishi Sunak revealed various schemes to provide much-needed assistance to the economy, so the national debt is on track to keep on increasing in the months ahead. Debt levels make interesting headlines but in reality, the sums involved are unlikely to impact the pound. Bond yields have been in focus lately and should the yield on the 10-year gilt top 1%, that could attract negative attention for sterling.           

Canadian retail sales for January are predicted to fall by 3% on a month-on-month basis and that would be an improvement on the -3.4% decline seen in December. The details will be posted at 12.30pm (UK time).    

EUR/USD – while it holds below the 50-day moving average at 1.2072, the recent bearish move should continue, support might be found at 1.1800. A break above 1.2242 should bring 1.2349 into play.

GBP/USD – since late September it has been in an uptrend, it hit a 34-month high last month. If the positive move continues, it should retest 1.4241. A pullback might find support at 1.3813, the 50-day moving average.   

EUR/GBP – has been in a downtrend since mid-December, last month it dropped to an 11-month low, and further losses might target 0.8400. A rally above 0.8730 should put the 0.8800 area on the radar.

USD/JPY – has been in an uptrend since early January, this week it hit a nine-month high. If the positive move continues it could target 109.85. A pullback from here could find support at the 108.00 area or 105.50, the 200-day moving average.