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Daily Wrap Up 15 July 2022

15 Jul 2022 04:57 PM

Equities rally as yields slide

The fall in government bond yields has paved the way for a rally in stocks. Lately there has been a strong inverse relationship between yields and equities and that is playing out today. Yesterday the US 10-year yield moved above 3% in the wake of the hot US PPI reading as fears ran high the Federal Reserve might become even more hawkish than previously expected, while today the yield has fallen to 2.9%. A few hours ago, the US retail sales report for June was posted and it came in at 1%, marginally above estimates, and it was a big improvement on the -0.3% seen in May. Initially there was a spike in volatility as dealers felt the Fed would interpret it has hawkish, but things have simmered down. The S&P 500 is up 1.8% and the Dow Jones is 2% higher. Sentiment is also bullish in Europe, the outperformer is the DAX as it is up 2.7%, keep in mind the market fell to nine-day low yesterday.

Bond yields play less of a role in this part of the world, but continental Europe has more pressing issues. Countries like Germany are heavily dependent on Russian gas and leaders in Europe are drawing up plans for the possibility of Moscow curtailing, or even halting supply in winter. Eurozone equities might be enjoying a rally this afternoon, but the landscape could look different next week when we hear from the European Central Bank. In recent weeks, the ECB have made it clear they will lift rates by 25 basis points at this meeting, but the focus will be on the commentary they use with regards the September meeting. It was suggested by policy makers the bank might look to do a large rate hike in September. Judging by the actions of other central banks, it is quite possible the ECB will start off slow with regards to tightening policy, and then look to ramp up quickly, and that could spark a rally in eurozone bond yields.

The drop in US yields is weighing on the US dollar, then again, the greenback hit a new 20-year high yesterday, so it was starting off from a high point. EUR/USD is eyeing 1.0100 as bargain hunters have stepped into the fold. Silver and copper are rebounding on account of the dollar, while gold is fractionally lower as the overall risk-on mood is weighing on the asset.

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