Firmer yields continue to weigh on equity markets

European markets underwent another negative session yesterday, with the DAX and CAC 40 slipping to their lowest levels in 6-months, as firmer yields and stagflation concerns kept markets on the back foot. We could also be seeing the result of technical effects after both the French and German benchmarks fell below their respective 200-day SMA’s earlier this week.

US markets also slipped back with the S&P500 and Nasdaq 100 closing at their lowest levels since early June, after US consumer confidence slowed more than expected in September, and new home sales slipped to a 5-month low.

This weakness looks set to continue this morning with another soft start for European markets, with Asia markets also on the back foot. 

Yields on US treasuries have continued to push higher, with a $48bn 2-year treasury auction achieving its highest yield since 2006, while the US dollar index closed at its highest level since November last year.

The rise in the US dollar, along with yields appears to speak to an expectation that sticky inflation will be sustained, keeping rates higher for longer, particularly since oil and gasoline prices appear to be showing little sign of drifting back from their recent highs. 

The rise in the US dollar is also causing problems for the Bank of Japan after Japanese finance minister Suzuki said that he viewed recent currency moves on the currency with a high sense of urgency. Suzuki went on to say that appropriate action would be taken against rapid FX moves. Unfortunately for the Japanese government momentum is in the US dollars favour while the Bank of Japan continues to argue the case for further easing.

The very prospect of stickier US inflation will mean that Fed will err more towards higher US rates for longer which means the line of least resistance is for USD/JPY to move through 150 and on to last year’s peak at 152.00, unless the BoJ suddenly reverses course.

The Fed isn’t being helped by concerns that the trickledown effect of the ironically named inflation reduction act fiscal stimulus is making the Federal Reserve’s job much more difficult in pulling inflation back to target in the coming months.    

EUR/USD – Remains under pressure with the March lows at 1.0515 the next support, along with the lows this year at 1.0480. Currently have resistance at 1.0740, which we need to get above to stabilise and minimise the risk of further weakness. 

GBP/USD – Slipped below the 1.2190 area, with the bias remaining for a retest of the 1.2000 area. Only a move back above the 1.2430 area and 200-day SMA stabilises and argues for a return to the 1.2600 area.    

EUR/GBP – Continues to find resistance at the 200-day SMA at 0.8720, which is capping the upside. A break here targets the 0.8800 area, however while below the bias remains for a pullback. If we slip below the 0.8660 area, we could see a move back to the 0.8620 area.

USD/JPY – Continues to creep towards the 150.00 area with support currently at the lows last week at 147.20/30. Major support currently at the 146.00 area.

FTSE100 is expected to open 9 points lower at 7,616.

DAX is expected to open 26 points lower at 15,230.

CAC40 is expected to open 4 points lower at 7,070.