Stocks off lows but pressure remains
Today saw US 10-year yields hit a fresh 2023 high, approaching the key 5.00% level. In response, Wall Street shares fell, which pushed the major indices into the negative territory. The S&P 500 was down about 1% to display a large bearish-looking candle on the daily time frame until about half an hour ago.
The bond market found some support late in the session after stronger-than-anticipated demand at a $13 billion, 20-year sale. This caused indices to bounce sharply off their earlier lows.
But while the markets were trying to stage a recovery at the time of writing, I reckon there are not many positive fundamental factors to help change investors’ risk appetite materially. So, I wouldn’t be surprised if markets remain under pressure for a while yet.
In Europe, both the DAX and FTSE formed large red candles on their daily charts to point to more potential losses on Thursday. The likes of the EUR/USD and other major FX pairs also turned lower as risk appetite soured.
As investors assess the risks of interest rates remaining high for longer, and of course, the escalation of the situation in the Middle East following the bombing of the hospital in Gaza, they are not going to be aggressive in risk-taking you would think.
Why are stocks struggling for direction?
It all comes down to appetite for risk. Right now, and rightly so, there is not much appetite for excessive risk taking given these uncertain economic times and raised geopolitical risks. With interest rates being at their highest levels since before the financial crisis, and the full economic impact of those hikes not fully filtered through the economy yet, many investors are wondering what lies ahead in the months to come. Granted, there are signs that inflation and interest rates have peaked, and that looser monetary policy should follow. But we just don’t know how long inflation is going to remain elevated, which in turn raises question marks about the longevity of high interest rates. Judging by recent data in the US, oil prices and Fed commentary, it can be a long time before the Fed starts cutting rates again. Similarly, both the ECB and BoE have indicated rates will remain high for loner. That’s before we even put into equation the recent flare up in the Middle East crisis, a situation which could further fuel the oil rally and pressurise risk assets.
Earnings focus turns to technology sector
Following the mostly better-than-expected results from US banks, the focus will turn to technology earnings. The earnings calendar contains electric vehicle maker Tesla and streaming giant Netflix to kick things off today, ahead of the other tech giants next week. So far, company earnings have failed to materially lift market sentiment, but let’s see if that will change in the weeks ahead.
‘Higher for longer’ narrative boosted by data
This week’s major economic data are mostly out of the way. Chinese GDP, retail sales and industrial production all came in better-than-expected overnight, a day after US retail sales and industrial data also topped expectations. We also had a stronger UK CPI print today to remind us that the job of the BoE and other central banks fighting inflation is not completely over. While the stronger data will alleviate some concerns over the health of the global economy, the US numbers in particular will encourage the Fed to maintain interest rates high for longer. That may keep the pressure on bonds, keeping yields supported and hurting the appetite for stocks that pay low or no dividends. There are lots of Fed speakers this week, including Fed Chair Powell who is due to speak on Thursday at the Economic Club of New York Luncheon.
Written by Fawad Razaqzada, market analyst at FOREX.com
The bond market found some support late in the session after stronger-than-anticipated demand at a $13 billion, 20-year sale. This caused indices to bounce sharply off their earlier lows.
But while the markets were trying to stage a recovery at the time of writing, I reckon there are not many positive fundamental factors to help change investors’ risk appetite materially. So, I wouldn’t be surprised if markets remain under pressure for a while yet.
In Europe, both the DAX and FTSE formed large red candles on their daily charts to point to more potential losses on Thursday. The likes of the EUR/USD and other major FX pairs also turned lower as risk appetite soured.
As investors assess the risks of interest rates remaining high for longer, and of course, the escalation of the situation in the Middle East following the bombing of the hospital in Gaza, they are not going to be aggressive in risk-taking you would think.
Why are stocks struggling for direction?
It all comes down to appetite for risk. Right now, and rightly so, there is not much appetite for excessive risk taking given these uncertain economic times and raised geopolitical risks. With interest rates being at their highest levels since before the financial crisis, and the full economic impact of those hikes not fully filtered through the economy yet, many investors are wondering what lies ahead in the months to come. Granted, there are signs that inflation and interest rates have peaked, and that looser monetary policy should follow. But we just don’t know how long inflation is going to remain elevated, which in turn raises question marks about the longevity of high interest rates. Judging by recent data in the US, oil prices and Fed commentary, it can be a long time before the Fed starts cutting rates again. Similarly, both the ECB and BoE have indicated rates will remain high for loner. That’s before we even put into equation the recent flare up in the Middle East crisis, a situation which could further fuel the oil rally and pressurise risk assets.
Earnings focus turns to technology sector
Following the mostly better-than-expected results from US banks, the focus will turn to technology earnings. The earnings calendar contains electric vehicle maker Tesla and streaming giant Netflix to kick things off today, ahead of the other tech giants next week. So far, company earnings have failed to materially lift market sentiment, but let’s see if that will change in the weeks ahead.
‘Higher for longer’ narrative boosted by data
This week’s major economic data are mostly out of the way. Chinese GDP, retail sales and industrial production all came in better-than-expected overnight, a day after US retail sales and industrial data also topped expectations. We also had a stronger UK CPI print today to remind us that the job of the BoE and other central banks fighting inflation is not completely over. While the stronger data will alleviate some concerns over the health of the global economy, the US numbers in particular will encourage the Fed to maintain interest rates high for longer. That may keep the pressure on bonds, keeping yields supported and hurting the appetite for stocks that pay low or no dividends. There are lots of Fed speakers this week, including Fed Chair Powell who is due to speak on Thursday at the Economic Club of New York Luncheon.
Written by Fawad Razaqzada, market analyst at FOREX.com
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