Volatility in the markets has drifted lower today as equities are trading within a relatively small range, and the currency market is calmer too. Equity markets in Europe are largely higher this afternoon as the rebound that began on Tuesday is still in play. European equities are taking their cues from US indices like the NASDAQ 100 and the S&P 500. American stocks suffered large losses on Monday due to growing speculation the Federal Reserve might hike interest rates in March. At the start of the week, the yield on the 10-year US government bond hit 1.80% - the highest in two years. A rise in bond yields indicates that traders are beginning to anticipate an interest rate hike. In the past couple of sessions, the 10-year yield has dipped, and in turn that has driven up stocks, but the yield is fractionally higher today, and it seems to be acting as a barrier to further gains.
Today’s US PPI report came in at 9.7%, just below the 9.8% forecast. The previous reading was 9.6%, so the update showed there was a tiny increase. It was a similar situation yesterday, whereby, the headline CPI level was 7%, up from 6.8%. It has been well documented that costs have surged in the past year, but seeing as expenses for producers and consumers are increasing at a small rate, that could be a sign that prices might begin to level off. The high level of inflation is a major factor behind the Fed’s increasingly hawkish stance, but should costs cool a little, the rhetoric surrounding rate hikes might dampen down.
EUR/USD was trading in a range in December and into early January, but in the past 48 hours it has jumped, largely down to a broad decline in the US dollar. The greenback enjoyed a major rally from May to mid-December but since then it has come off the boil a little. It is possible that a lot of the positive news associated with the dollar - tapering as well as the chatter of rate hikes – has already been factored into the price. EUR/USD hit a nine-week high.
Sterling was already moving higher versus the dollar in recent weeks, so the bout of dollar selling has ramped up GBP/USD to a level last seen in late October. There is talk the Bank of England could hike rates in the next few months too.
The mood in the metals market is mixed as silver is higher again, thanks to the slide in the greenback but gold is in the red. Since mid-December, gold has been in an uptrend, and if it clears $1,831, that could pave the way for further gains.