Global equities declined while the yield curve flattened on Monday as concerns around inflation and a potential conflict in the Ukraine continued to weigh on sentiment.
As of 07:14 am AEDT the S&P500 was -0.61% lower weighed by declines in financials -1.38% and health care -1.17% while consumer discretionary +0.56% outperformed with 80% of stocks lower. The Dow Jones weakened -0.61%, the Nasdaq Composite edged -0.02% lower and Russell 2000 -0.40% with the VIX rising +10.45% to 30.22 having risen +51% over the prior three sessions. Earnings season is now losing focus as investors concentrate on the risk of tensions in the Ukraine as well as a more hawkish Federal Reserve. Still, earnings season has been positive with 359 of the S&P500 companies reporting of which 76.8% have surpassed earnings estimates by an average of +6.03%.
Federal Reserve Bank of St. Louis President James Bullard, considered to have a more hawkish view, said the central bank needs to move forward with plans to raise interest rates to maintain its inflation fighting credibility. “I do think we need to front-load more of our planned removal of accommodation that we would have previously”. Traders are now pricing in +6.6 rate hikes by the end of 2022 based on Fed Fund futures. The 2-year Treasury yield rose +8.9 basis points on Monday to 1.589%, more than longer-dated yields flattening the curve with both the 10 and 30-year rates +5.4 and +5.7 basis points higher. Breakeven inflation rates rose with the 1-year rate +20.8 basis points higher at 4.621% and both the 5 and 10-year rates gained +8.8 and +3.9 basis points to 3.012% and 2.516%. Overnight we’ll get a further picture of inflation with U.S. producer prices for January expected to show a rise of +0.5% over the month from +0.3% previously.
European equities were broadly lower with the Euro Stoxx 600 down -1.83% with all sectors negative as financials -2.83% and industrials -2.11% the biggest contributors to declines with 93% of stocks lower. The DAX also declined -2.02%, as did the CAC -2.27% and FTSE100 -1.69% with major European benchmarks were lower across the board reaching a three-week low as the situation in the Ukraine weighed on sentiment. 10-year government bond yields were mixed, ranging from -2.3 basis points in Sweden to +4.5 basis points in the U.K. with the Euro -0.44% lower at 1.1300 as was the Pound -0.29% at 1.3524. There was little economic data on Monday while investors will focus on U.K. unemployment for the three months to December tonight expected to remain stable at 4.1%, followed by Eurozone GDP for Q4 estimated to rise to +4.6% along with the ZEW economic sentiment index for February.
*Note: These prices are based on futures and/or CFD pricing and may therefore differ slightly from spot pricing.
The ASX is set to open lower this morning with ASX200 futures down -85 points or -1.19% to 7,062. The index rose +0.37% on Monday driven by gains in financials +1.54% and energy +3.36% with only 40% of stocks rising in thin breadth. Energy stocks gained following a rise in oil over tensions in the Ukraine with WPL up +3.63%, as was STO +4.04% and BPT +9.43% after also reporting higher interim profit which rose +66% to $212.99 million. Gains in gold as a haven also boosted gold miners with NCM up +4.3%, as was EVO +7.9% and NST +5.9%. The Australian dollar is -0.18% weaker at 0.7124 this morning and the 10-year government bond yield declined -7.2 basis points to 2.138%.
Oil prices extended gains over concerns of supply should tensions over the Ukraine escalate further with both WTI and Brent crude +1.66% and +1.31% higher at US$94.69 and US$95.71 a barrel. Natural gas prices also rose over concerns of a conflict with contracts for delivery in the U.K. and Netherlands rising +5.71% and +3.85% respectively. Iron ore futures in Singapore declined -0.93% on Monday and are a further -4.42% lower this morning at US$141.85. Gold rose +0.66% to US$1,870 benefiting from its status as a haven with silver also +1.10% higher at US$23.84 while bitcoin edged -0.34% lower to US$42,084.
Economic data:
- U.K. Unemployment Rate (QoQ Dec) 18:00
- Eurozone GDP (QoQ Q4) 21:00
- Eurozone ZEW Economic Sentiment (MoM Feb) 21:00
- U.S. Producer Prices (MoM Jan) 00:30
This article was written by James Woods, Portfolio Manager, Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3632.
