Daily Wrap Up 07 June 2022

7 Jun 2022 04:25 PM

Sterling gets BoJo boost

Fears about highs levels of inflation and the prospect of further interest rate hikes are doing the rounds. The US 10-year yield traded above 3% earlier today, while this time last week it was below 2.75%. A rise in yields typically means the bond market is pricing-in more rate hikes. Even though the minutes from the latest Federal Reserve meeting were not as hawkish as expected, it still looks as if the Fed will hike rates by 50 basis points this month and in July. CPI in the US is 8.3%, so should rates be lifted by 1% over the next two months, that is likely to compound the cost-of-living situation. In keeping with the theme of the past few weeks, the US tech sector experienced the biggest jump in volatility amid relatively elevated bond yields. The NASDAQ 100 was in the red, but it is now up 0.6%. Once again, London-listed commodity stocks are helping the FTSE 100 as the British index is basically flat on the day, while continental indices are in the red.

The British pound has experienced a jump in volatility as the UK’s Prime Minister, Boris Johnson, survived a vote of no confidence last night. More than 40% of his own MPs voted to oust him which indicates that he is not on solid ground. The rules dictate that there can’t be another vote for 12 months, so he is safe for now, but the large minority who do not support him suggests he could be in the final six-twelve months of his premiership. Sterling is higher this afternoon as the short-term uncertainty that Mr Johnson could be replaced has diminished for now.

The Australian dollar is higher versus most major currencies following the decision by the Reserve Bank of Australia to hike rates by 50 basis points. Economists were expecting a 25-basis point hike, so it caught the markets by surprise. It was the second rate hike by the RBA in five weeks, so that underlines how eager the bank is to curtail inflation. CPI in Australia is at its highest level in 30 years. It is fair to say the RBA have been influenced by the actions of other central banks – the Bank of England lifted rates four times in six months, and we have seen five rate hikes from the New Zealand central bank since October - so it is possible the RBA will continue to lift rates in the months ahead.

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