Bond and stocks rally again
It was another positive day in markets as bonds and stocks rallied again alongside a further fall in oil prices, fuelled by hopes that there may soon be some resolution to the situation in the Strait of Hormuz. It was quiet enough in FX though. The euro and sterling are in consolidation mode against the dollar – for now at least – following the gains they chalked over the latter part of last week. They are trading at around $1.1540 and $1.3460 respectively this morning, both just marginally firmer relative to yesterday morning’s levels, leaving EURGBP little changed at about £0.8575. The yen, meanwhile, is holding onto its intervention-driven gains against the dollar and the euro, trading at around Y158 and Y182 respectively.
There was some further easing of central bank rate hike expectations as oil prices headed south – Brent crude is back below $80 per barrel having closed at $90 p/b at the end of last week – which in turn contributed to another leg lower in bond yields (with 2-and 10-year yields falling by 5-7bps across the main markets). Equity markets also rallied. The S&P 500 in the US closed at a new record high on the back of gains of over 1.5%, while European stocks added another 1% or so. Asian equities had a positive session overnight as well – Japan’s Nikkei index was up almost 4% – which should ensure a positive open for European indices this morning.
Fed member Schmid adds to calls from a number of his colleagues for higher interest rates. He says “given the strength of demand and investment, I do not see the current stance of monetary policy as restrictive…as such, I believe that bringing inflation down to the Fed’s 2% objective will require tighter policy.” He also adds that he’s “uncomfortable ever assuming that a burst of inflation will be temporary,” noting that “how persistent a spike in inflation is ultimately depends importantly on how the Fed reacts or is expected to react.”
Looking to the day ahead, economic data due include the ISM services index and ADP employment report (both for July) in the US and producer prices (for June) in the Euro area, while final readings for the July services PMIs are due in the main economies. There are a few Fed members due on the wires over the course of the day.