Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 72% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.

Could US short term yields act as a headwind for further stock gains?

The last two years have been good ones for the FTSE100, DAX and S&P500 with average gains of around 10% for all three, with the S&P500 in particular outperforming last year with a gain of over 20%.

This trend continued last week as markets returned from their Christmas break on the front foot as both the FTSE100 and the S&P500 made new record highs, while the DAX remains shy of the record peaks seen a couple of months ago. Despite this inability to post new record highs it was still last week’s best performer of the three, rising 3.5%.

Having got off to such a positive start in 2018 and with economic data continuing to look reasonably resilient despite a fairly average US jobs report, investors continue to appear to be happy to push this bull market even higher, despite some misgivings that, particularly in the case of US markets valuations remain stretched.

This is especially the case where the S&P500 is concerned when compared to short term US yields.

For most of this multi-year bull market we were told the main raison d’etre for investing in stocks was due to the ridiculously low level of government bond yields, due to central bank monetary easing and this made sense as investors hunted for yield and capital growth. This hunt for yield has become a little bit more complicated when it comes to US 2 year yields which are back to within touching distance of 2% for the first time since 2008.

On the flip side, due to the advance of the S&P500 over the last two years average dividend yields for that index has slipped to 1.84%, in essence meaning that government bonds now yield a higher return than stocks for the first time since the credit crisis.

For the moment this flip over doesn’t appear to be slowing investor appetite for stocks but it could serve to introduce an element of caution as central banks gear up for further tightening measures in the year ahead.

Fridays US jobs report wasn’t particularly great but it wasn’t terrible either and it won’t stop the Fed from tightening further in the months ahead. Last weeks Fed minutes indicated that while the FOMC believed that the recent tax cuts would probably boost economic activity they were more split on the wider effects vis-à-vis prices and wages. 

There is also the risk that commodity price inflation pressures start to make their way into the headline numbers which in turn could see headline CPI start to rise significantly in the months ahead prompting a more global central bank response.

While this still seems some way off equity markets still seem relatively comfortable at their current levels and look set to sustain last week’s momentum as we start the first full trading week of 2018.

Despite the prospect of more Fed rate rises in the coming months and the increase in US yields the US dollar had a disappointing week, while the euro and pound both had a decent one, though both were unable to break above their November peaks.

This may have something to do with the fact that while the US dollar is weak against these two currencies it still remains fairly strong against the Japanese yen and Swiss franc, and remains above last year’s low at 91.00 on the US dollar index basket of currencies.

EURUSD – has, as yet been unable to push beyond the highs of last year at 1.2095. While it does so the euro remains vulnerable to a fall back towards the 1.1980 initially, and then below that towards 1.1850. Above 1.2100 argues for a move towards 1.2170 which is 50% retracement of the 1.3995/1.0340 down move.

GBPUSD – has, as yet been unable to push beyond the highs of last year at 1.3660. While it does so the pound remains vulnerable to a decline back to the 1.3300 area. We also have interim support at the 1.3450 area. A move beyond the 1.3700 area argues for a move towards the 1.3830 level and February 2016 pre Brexit vote lows.

EURGBP – failed to overcome the 0.8925 area last week and 100 day MA prompting a slide back to the 0.8850 area. The bias remains to the downside on a break below 0.8820, while below here with key support remains back at the 0.8740 area, with a close below targeting a move towards 0.8650.

USDJPY – had a nice rally in the last three days but have been unable to overcome the 113.40 area which was trend line resistance from the November highs. To target those highs at 114.50 we need to push through the 113.60 area. Support comes in at the 112.00 area, which are one month lows.

CMC Markets is an execution only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.