European Stocks Drop as Yields Tick Higher, EU Stocks, DAX

[MongiIG]

EU STOCKS 50, DAX ANALYSIS:

• Uptick in US -2 year yield has EU equities trading lower – in lead up to Fed meeting next week
• Euro Stoxx Index weighed down by tech, real estate and financial sectors
• DAX, EU Stocks technical analysis and key near-term levels to watch

 

European stocks followed the Asian market lower in early trade on Tuesday, as higher, short to medium term yields in the US and Germany reinforced the market expectation of a ‘hawkish’ Fed and multiple rate hikes in 2022.

The big mover was the US 2 year (most responsive to near term rate expectations) as it surpassed the 1% mark for the first time since the start of the pandemic. In fact, the US 2 year yield last traded around the 1% handle in February of 2020, just before the start of the global lockdowns. The German 10 year bund trades slightly lower this morning around -0.03 but largely continues on its upward path towards zero.

US Bond Yields (2 year. 10 year and 20 year)

Source: Tradingview, prepared by Richard Snow

Elsewhere, in the Euro Stoxx 50 Index, sectors such as tech, real estate and financials trade in the red this morning with the one unsurprising standout being the energy sector, trading up by nearly 0.5% on the day.

Euro Stoxx 50 Sector Summary

Source: Refinitiv, prepared by Richard Snow

EU STOCKS 50 TECHNICAL ANALYSIS

The broad-based equity sell-off thus far looks rather tame for the time being. There has already been a sizeable pullback from the daily low as it failed to break and hold below the zone of support (4245 – 4255) however, the daily close will ultimately reveal whether a bounce or break is most favored.

Support: (4245 – 4255), 4195, 4135

Resistance: 4322

Euro Stocks 50 Daily Chart

Source: IG, prepared by Richard Snow

GERMANY 40 (DAX) TECHNICAL ANALYSIS

The DAX witnessed a bounce off the 200 day SMA earlier today and currently tests the 15770 zone of support. Failure to break and hold below the 15770 level and 200 SMA, may suggest that the sell-off is a temporary response to the uptick in rates and represents an opportunity to rejoin the bull trend as opposed to a deep pullback.

Support: 200 day SMA, 15770, 15430

Resistance: 16032, 16300

Germany 40(DAX) Daily Chart

Source: IG, prepared by Richard Snow

 

Written by Richard Snow for DailyFX.com. 18th Jan 2022

[MongiIG]

The 10-year U.S. Treasury yield jumped to its highest point in two years on Tuesday morning, topping 1.83%.

The yield on the benchmark 10-year Treasury note soared 5 basis points to 1.8305% at 3:40 a.m. ET. The yield on the 30-year Treasury bond climbed 3 basis points to 2.1492%. Meanwhile, the 2-year rate topped 1% for the first time in two years, hitting 1.0364%.

Yields move inversely to prices and 1 basis point is equal to 0.01%.

The move, which comes after a market holiday in the U.S. Monday, indicates that investors are preparing for the possibility of more aggressive tightening by the Federal Reserve.

Last week, Fed Chair Jerome Powell told the U.S. Senate that he expected to see a series of interest rate hikes this year, along with a pullback in other pandemic economic support measures.

Philadelphia Fed President Patrick Harker told CNBC last week that the central bank could raise rates three or four times this year. He noted that inflation is “more persistent than we thought a while ago.”

James Athey, senior investment manager at Aberdeen Standard Investments, told CNBC that the sudden spike in yields couldn’t be explained by any one new piece of news.

“The reality is that the market is still adjusting to the Fed’s ongoing hawkish evolution,” he said via email.

Athey referred to JPMorgan CEO Jamie Dimon’s comments on Friday, when he said the Fed could hike rates as many as seven times this year, according to multiple reports.

These comments, along with speculation that the Fed may hike rates by 50 basis points as soon as March, “are driving the front end to reprice which is dragging all yields up – though notably still the curve is flattening,” Athey said.

“Technically we look a little bit stretched given the pace of this repricing so I expect to see some consolidation around here – especially as the Fed is in blackout and they are the main driver of higher yields at the moment,” Athey explained.

Fed officials have gone into a no-comment “blackout” period ahead of the next central bank meeting on Jan. 25-26.

In terms of data releases due out on Tuesday, the January National Association of Home Builders housing market index is expected out at 10 a.m. ET.

Auctions are scheduled to be held for $60 billion of 13-week bills and $51 billion of 26-week bills. CNBC