Fed expectations continue to drive bond yields
In the bond markets, the 10-year United States (US) Treasury note yield climbed by 10 basis points, reaching over 3.93% on Thursday.
This rise followed a robust set of economic data, which has cast doubt on expectations for significant interest rate cuts by the Federal Reserve (Fed). The increase in retail sales and a drop in new unemployment claims have fuelled speculation that the Fed might opt for a smaller 25 basis point cut in its upcoming September meeting, instead of the previously anticipated 50 basis point, or more, cut.
In the United Kingdom (UK), the 10-year gilt yield remained around 3.85%, as traders analysed recent economic data showing a slowdown in the UK’s GDP growth and a decline in inflation.
Equity markets rally on encouraging US data
Equity markets experienced a positive day on Thursday. In the US, major indices saw notable gains, with the S&P 500 rising by 1%, the Nasdaq by 1.2%, and the Dow Jones surging over 510 points. This uptick was driven by stronger-than-expected US retail sales data, which alleviated concerns about a potential recession. Consumer discretionary and materials sectors led the gains, with notable performances from tech companies like Microsoft, Apple, Nvidia, and Meta, as well as online retailer Amazon. On the earnings front, digital communications conglomerate Cisco and retailer Walmart reported better-than-expected results, contributing to the positive market sentiment.
In Europe, the FTSE 100 increased by 0.8% to close at a two-week high, boosted by upbeat US retail sales data. Germany’s DAX also continued its winning streak, rising towards the 17,950 mark. Gains were broad-based, with financial and healthcare sectors performing well and auto manufacturers such as Mercedes and BMW extending their gains.
Oil prices recover
In the commodities market, Brent crude oil prices recovered to near $80/barrel on Thursday, following expectations of potential US interest rate cuts, which could boost economic activity and oil demand. This was coupled with concerns over tensions in the Middle East. The rise in oil prices came despite a surprising increase in US crude oil inventories, which ended a six-week decline.
Gold prices also increased, surpassing $2,450/ounce, as investors assessed the latest US Consumer Price Index data for insights into the Fed’s monetary policy direction. Although US consumer inflation eased to 2.9% in July, below market expectations, the possibility of a smaller Fed rate cut dampened some of the strong momentum for gold. Nonetheless, gold continues to benefit from its safe-haven appeal amid ongoing geopolitical tensions in the Middle East.
Euro and US dollar steal the show
The US Dollar Index climbed above 103.1, rebounding from a seven-month low, as strong economic data supported the case for a less aggressive dovish stance by the Fed; the recovery was, however, short lived. The euro rose above $1.10/€, hitting its highest level since early January, while the pound hovered around $1.28/£, supported by recent economic data that aligned with market expectations.
Key Indicators:
GBP/USD: 1.2880
GBP/EUR: 1.1725
GOLD: $2,457.12
BRENT CRUDE: $80.89
Sources: Trading Economics, Bloomberg, Reuters/Refinitiv, Financial Times, Daily Investor, and Biznews.
Written by Citadel Global Director, Bianca Botes.
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