Daily Wrap Up 18 January 2022

18 Jan 2022 04:29 PM

Stocks fall amid rising yields

Equities are under pressure as the rise in US government bond yields suggests the markets are pricing-in an interest rate hike from the Federal Reserve. In recent weeks, there has been growing speculation the US central bank will hike rates three or possibly four times in 2022. The US 10-year yield was above 1.83% today, its highest level in two years. It was the fresh multi-year high in the yield that sparked today’s wave of selling in stocks. The upward move in yields is not just confined to the US, as the UK 10-year gilt yield hit a three-month high, and the German bund yield reached its highest level since 2019. The increase in yields across the board is an indication that we are moving closer to a period of tighter monetary policy.

Seeing as the US central bank is in focus with regards to the possibility of higher rates in the next couple of months, it is US indices that are suffering the most. The tech-heavy NASDAQ 100 is nursing the largest loss out of the American indices. Technology companies are typically relatively indebted, and in turn a possible rate hike could have a big impact on the industry. European equity benchmarks are in the red too due to the overall fears surrounding higher rates. The FTSE 100 retreated from yesterday’s 23 month high, and it is down 0.5%.

EUR/USD and GBP/USD are showing large losses due to the sharp rally in the US dollar, which is up over 0.55%. It seems the rise in US government bond yields has boosted the greenback. In the past week, the dollar witnessed a jump in volatility as it dropped to a two-month low last Friday but has since enjoyed a rally. The dollar has been in an upward trend since May 2021, and with increasing chatter about rate hikes, the dollar is likely to remain in demand.

Gold underwent a U-turn today as it fell to a one-week low and subsequently pulled back most of the lost ground. The rally in the past few hours is impressive due to the strength of the dollar. Brent crude hit its highest mark in over seven years following the news of a suspected drone attack on an oil tanker in Abu Dhabi triggered concerns about supply levels.

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