Bond yields have been on a steep ascent this week which has other assets trading in a nervous fashion.
The rise in treasury yields reflects the outlook for an extended period of high interest rates – and this outlook is not sitting too well in terms of risk appetite on financial markets right now.
As such, the constraining effect that tight monetary policy has on growth prospects for the economy is making gains hard to come by for equity markets and other risk-assets.
And the rise in treasury yields is acting as a constant reminder to investors that elevated interest rates are likely not going away anytime soon. So, it really is all about the heightened bond yields which are posing somewhat of a psychological challenge for traders.
Treasury yields headed north and the gold price headed south, with the precious metal loosing out in terms of opportunity cost to the returns on offer in the bond market.
Spot gold is slipping further below the $1900 level, with the higher USD also reducing the appeal of the precious metal. Absent a pick-up in safe haven demand, gold will likely need to rely on a pullback in yields to reclaim the $1900 handle anytime soon.
In FX, the greenback remains the currency of choice with the yield differentials favouring the USD. He DXY (Dollar Index) has rocketed above the 106 level this week, with the rise fuelled by the hawkish Fed outlook delivered last week.
With the US Dollar on the charge, other currencies have fallen by the wayside, with gains in the ‘buck’ underpinned by the rise in bond yields.
The USDJPY rate is perilously close to the 150 level which could have the BOJ ready to pull the trigger on intervention. But the headache for policy makers in Japan is that these market moves are really more a story driven by USD strength rather than any specific Yen weakness.
In other words, virtually all currencies are suffering losses to the USD. So, if the BOJ takes action to boost the Yen, they will be going head-to-head against the considerable momentum of the US treasury yields.
Elsewhere, supply dynamics continue to work in favour of the oil price with the WTI and Brent contracts posting new highs for the year.
A fall in US crude stockpiles added a boost to the oil price, while ongoing supply cuts from OPEC+ are keeping things tight on the supply side. While a longer period of high global interest rates could be problematic for oil demand in the future, supply side traits could favour continued upside risks for the price in the short-term.
Looking ahead for the rest of the week, investors will be scrutinising upcoming GDP and Core PCE Price Index data in the US for clues as to how this may affect FOMC interest rate decisions in coming months.
Meanwhile, China’s PMI data will be closely watched over the weekend for any signs that the bottom may already have been reached regarding the downturn. But for the time being, the direction that bond yields move looks likely to remain pivotal in terms of the prevailing market sentiment.
Market commentary from Tim Waterer, chief market analyst at KCM
