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Daily Market Comment – Sterling shines as yields rally, stocks mixed



  • Global spike in yields boosts sterling and US dollar, crushes yen
  • Stock markets mixed as traders rotate towards ‘cheaper’ sectors
  • Fed minutes and ADP jobs report coming up today
Sterling leads the pack

Every asset class has been dancing to the tune of rising bond yields this week. The bond market is essentially saying that some central banks will raise interest rates with force to combat inflation and that the Omicron outbreak is not enough to derail those plans, or even slow them down. 

This has been a blessing for the British pound and the US dollar as traders have started to entertain the idea that the Bank of England could raise rates again next month and that the Fed could get the ball rolling in March.

Money markets are currently pricing in a 70% probability for a BoE rate hike in February, which helped push euro/sterling to a new post-pandemic low yesterday, along with some signals from Prime Minister Johnson that further covid restrictions are unlikely.

In contrast, the yield rally has been a curse for the yen since the Bank of Japan is not expected to join the global rate hike party in the coming years, with the economy having just escaped deflation. Dollar/yen met resistance around the 116.30 region yesterday, but if it pierces through, there isn’t much standing in the way until the 2016 peak of 118.66. 

‘Expensive’ stocks under fire

In the stock market, it has been a classic rotation towards ‘cheap’ sectors and away from ‘expensive’ ones. Tech and growth names got smoked yesterday as higher yields make it more difficult to justify the exorbitant valuations of many companies, driving investors towards value plays with solid profits that are less sensitive to rising rates.

Reflecting as much, the tech-heavy Nasdaq lost 1.3%, the S&P 500 closed unchanged, while the Dow Jones rose by 0.6%. European markets have done better though, thanks to their concentration of value names. The British FTSE 100 reached a new post-pandemic high yesterday despite the stronger pound, which typically holds the index back. 

US releases in the limelight

There’s a barrage of US economic releases over the next week that could be crucial for the dollar as markets currently assign a 65% chance for the Fed to raise rates in March. The show will get going with the ADP jobs data and the minutes of the December FOMC meeting today, ahead of Friday’s employment report and next week’s inflation stats.

Several Fed officials have been on the wires since the December meeting explaining the rationale behind their aggressive shift, so the minutes are unlikely to make waves in the markets. Instead, the ADP numbers could attract more attention as traders calibrate their expectations for Friday’s official jobs report. 

Staying in America, the ISM manufacturing survey that was released yesterday suggested inflationary pressures are finally cooling. Of course, this is just one data point, but if there are more signs ‘peak inflation’ is around the corner in the coming months, there could be a drastic rethink about central banks. This is the key risk to the rally in bond yields. 

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