In spite of hawkish testimony by Federal Reserve (Fed) officials, bulls in European equities, specifically the DAX index, remained unfazed. The DAX index saw a rise in closing numbers following Powell’s first day of Senate testimony. The German market received a boost from January’s industrial production numbers, which exceeded expectations. Additionally, the German 10-year yield continued to decline from March peak levels, contributing to the DAX’s positive performance on Wednesday.
The Eurozone’s GDP growth in Q4 was null, with a yearly slowdown that was greater than expected. The European Central Bank (ECB) is unwilling to boost the economy and instead plans to abate inflation through rate hikes. It’s expected that the ECB will hike by 50bp at this month’s meeting, with a total of 150bp hike until summer. This move is being fueled by the ECB hawks and has led to fresh highs in European yields since the Eurozone’s debt crisis. This is bad news for equity traders as it poses a threat to European stocks.
The sinking euro and rising yields are causing concern for European stocks. A softer euro may be good for some businesses as it boosts sales abroad, but it also makes the cost of energy and raw materials more expensive for European businesses, leading to inflation. Rising inflation means higher rate hikes and the prospect of slower economic growth.
In summary, European stocks should be worried as the sinking euro and rising yields put them in jeopardy. The ECB’s plan to abate inflation through rate hikes may have negative consequences for the Eurozone’s economic growth.
Fed Chair Powell’s Hawkish Testimony and Strong Jobs Data Fuel Speculation of Interest Rate Hike
During Fed Chair Jerome Powell’s second day of testimony, he made a small tweak to his language, stating that the data will determine whether the Fed will increase the pace of interest rate hikes, but “no decision has been made on this” yet. However, this failed to cool down the markets as the probability of a 50bp hike went above 80% due to strong economic data. The US 2-year yield advanced above 5%, while the 10-year yield hovered around 4%, and the S&P500 swung between small gains and losses. The US dollar index also extended gains. Investors are awaiting Friday’s US jobs data and risks are two-sided. Soft data could easily spur a risk rally.
Rising US Yields and Strong Dollar Weigh on Gold, While Energy Bears Emerge
The rapid surge in the US dollar and rising US yields have put pressure on precious metals, with gold now in a bearish consolidation zone below the major 38.2% Fibonacci retracement on November to February rally. It is currently testing the 100-DMA, which stands a couple of dollars above the $1800 level, and could see a rapid drop below the $1800 mark with strong data between today and Tuesday. The next target for gold bears is the 200-DMA, at $1775 per ounce. Meanwhile, American crude has dropped nearly $5 per barrel, failing to hold onto gains above the 100-DMA, due to rising recession odds caused by hawkish Fed expectations.
Read Interest Rate Divergence: How the US and Europe are Moving Apart
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