Stocks rise and bond yields march higher, as investors focus on economic recovery, instead of Trump turmoil and COVID crisis
- Stocks rose, boosted by investor optimism over the outlook for the economy, in light of an anticipated deluge of stimulus from a Democrat-led Congress.
- Democrats will vote on whether to impeach Donald Trump a second time over his role in the storming of the Capitol last week, but financial markets are showing little reaction.
- Federal Reserve speakers have signaled they could be less likely to add to any stimulus packages and that the rise in Treasury yields is a welcome sign the central bank's policies are working.
Global stocks rose on Tuesday, shaking off the political turmoil in Washington DC, where Democrats are preparing to impeach Donald Trump for a second time, and rising COVID-19 cases around the world, while bond yields marched higher and Bitcoin recovered after a harsh sell-off.
On Monday, Republicans blocked an attempt by House Democrats to introduce a resolution for Pence to forcibly remove Trump. House Speaker Nancy Pelosi gave Pence a deadline to invoke 25th Amendment or the House will move to impeach the president.
Democrats have planned to take up a vote to impeach Trump on Wednesday for his role in the insurrection; he could become the first president to be impeached twice.
Yet financial markets showed little reaction to the developments on the political, or healthcare front, as global cases of COVID-19 passed the 90-million mark and deaths neared 2 million.
US stock futures pointed to a stronger open at the start of trade later. S&P 500, Dow Jones and Nasdaq 100 futures rose between 0.2 and 0.3%, suggesting the benchmark indices will recover from Monday's sell-off.
"The fall in stocks yesterday needs to be put in the context of the large gains that were posted last week. For some time there was chatter that equities were looking lofty so a move to the downside wasn't exactly a surprise," CMC Markets market analyst David Madden said.
"In recent sessions, the speculation that President-elect Joe Biden will map out new stimulus plans has dominated the headlines. Also the vaccine news is assisting the upbeat sentiment. Stocks on both sides of the Atlantic fell yesterday, but traders haven't lost sight of the Biden and vaccination roll-out stories," he said.
In Europe, the STOXX 600 rose 0.3%, led by advances in North Sea oil producers Equinor, Petrofac and Lundin Petroleum, and by financial stocks, including fund managers Man Group, Janus Henderson and Jupiter Fund Management.
Overnight in Asia, equity investors shook off a spike in COVID-19 cases in China. The Shanghai Composite closed 2.2% higher, while Tokyo's broader TOPIX index rose 0.2%.
A flurry of Federal Reserve officials, including Richmond's Tom Barkin, have recently signaled the central bank is comfortable with the rise in Treasury yields. Barkin told Reuters in an interview late last week that increasing market-based inflation expectations and higher yields showed the Fed's monetary policy strategy was working.
With a Democrat-controled Congress and Biden promising trillions of dollars in spending, the expectation among fixed-income investors is for the pressure on the Fed to keep providing stimulus to lessen. Indeed, Goldman Sachs raised its economic growth forecast for the US and said it expects the first Fed rate rise to take place now in the second half of 2024, rather than early 2025.
Yields on the 10-year Treasury note are now at their highest since March 2020, having wiped out all the price gains during the pandemic, while those on the 2-year note are around one-month highs. Crucially, the spread - or gap - between the two has now reached 100 basis points for the first time in almost four years.
A wider spread reflects a belief among investors that there will be a pickup in inflation and less likelihood of a near-term easing in monetary policy.
Ten-year yields were last up 2 basis points at 1.153%, while the 2-year note was yielding 0.147%, unchanged on the day.
Higher yields have helped improve the appeal of the dollar to overseas investors and pushed the dollar index off its lowest in nearly three years against a basket of major currencies this week.
However, as inflation expectations build, this will likely curb the dollar's advance north, analysts said.
"Any policy-related comments should - in our view - go in the direction of ruling out any unwinding of monetary stimulus in the foreseeable future," ING global head of markets Chris Turner said.
"With the Fed's rate expectations at rock bottom, any further rise in US yields will remain a function of rising inflation expectations or term premium, which leaves us confident on our bearish dollar call," Turner said.
After a 1.2% rally in the space of a week, the dollar index took a breather on Tuesday, holding steady around 90.47, which in turn lifted commodities such as gold, oil and copper, as well as cryptocurrencies, with Bitcoin rising back above $36,000 after its biggest one-day drop since late November on Monday.