Bonds at 2-Year High, Oil at 7-Year High; Goldman Earnings – What’s Moving Markets

U.S. markets have a severe attack of the post-holiday weekend grumps as inflation fears push bond yields to their highest in two years. Oil prices are also at seven-year highs after Iranian-backed rebels in Yemen claim responsibility for a drone attack on the United Arab Emirates. OPEC releases its monthly report, while the National Association of Home Builders is likely to chime in on a fresh surge in lumber prices, which are now at an eight-month high. Here’s what you need to know in financial markets on Tuesday, 18th January.

1. Bond yields hit two-year highs on inflation fears

Inflation fears drove U.S. Treasury bond yields to their highest level in over two years over the weekend, reviving a broad bid for the dollar in foreign exchange markets.

By 6:10 AM ET (1110 GMT), the yield on the benchmark 10-Year Treasury bond was at 1.81%, down from 1.86% earlier but still up 30 basis points from the start of the year. The benchmark two-year yield likewise breached the 1% level for the first time since February 2020, when the first wave of Covid-19 panic was gripping world financial markets.

The next landmark to be passed is likely to be in Europe, where the benchmark 10-Year German bond came close to trading above 0% for the first time since May 2019. The Bund was flat on the day, despite a remarkably strong reading from the ZEW Economic Sentiment index which rose to a six-month high. More granular business surveys from Europe’s largest economies may provide a more reliable guide to activity in the next weeks.

2. Oil at 7-year high after Houthi drone strike on UAE

One of the biggest factors stoking inflation fears has been the price of energy. Crude oil hit its highest level in over seven years overnight after Iranian-backed Houthi rebels in Yemen claimed responsibility for a drone strike on the port of Abu Dhabi in the United Arab Emirates.

The UAE is one of only two major producers in OPEC (the other being Saudi Arabia) that is actually capable of producing more oil than it did two years ago, so the extension of the Yemeni conflict casts additional doubt over the ability of OPEC and its allies to actually deliver the supply increases they have promised this year. Analysts also suspect Russia will not be able to raise its output by the envisaged 100,000 barrels a day after this month. OPEC’s monthly report is due at 7:30 AM ET, according to newswire reports.

By 6:20 AM ET, U.S. crude futures were up 1.7% at $84.70 a barrel, while Brent crude was up 1.2% at $87.46 a barrel.

3. Stocks set to open sharply lower as more bank earnings loom

U.S. stocks are set to start the week sharply lower, with technology again underperforming as higher bond yields put fresh strain on elevated valuations in the sector.

By 6:20 AM ET, Nasdaq 100 futures were down 1.8%, while S&P 500 futures were down 1.1%. Dow Jones futures were down 292 points, or 0.8%.

Goldman Sachs (NYSE:GS), PNC Financial (NYSE:PNC) and Charles Schwab (NYSE:SCHW) all report earnings before the start of trading, under the shadow of poorly-received results from JPMorgan (NYSE:JPM) and Citigroup (NYSE:C) on Friday that showed the sugar rush of stimulus-fueled profits fading.

Other stocks likely to be in focus include Alibaba (NYSE:BABA), reported to be the subject of new national security concerns at U.S. regulators, and Activision Blizzard (NASDAQ:ATVI), which has reportedly pushed out a large number of staff tainted by allegations of a toxic workplace culture.

4. BoJ refuses to panic

One central bank that is still in no hurry to tighten monetary policy is the Bank of Japan. Governor Haruhiko Kuroda played down any suggestion of a near-term rise in interest rates and said the BoJ’s policymaking council hadn’t even discussed the idea at its meeting earlier Tuesday.

That ran counter to a report last week that had pushed the yen up by over 1%. The dollar returned above the 115 yen level in response.

The BoJ did upgrade its inflation forecasts for the next two years but, at 1.1%, the forecasts remain far below the levels likely to be seen in the U.S. and Europe this year, let alone in emerging markets.

In other Japanese news, Toyota said it will miss its annual production forecast for the year ending in March, due to shortages of chips and other components. It has shut facilities in the Chinese city of Tianjin this month due to concerns about transmission of Omicron-variant Covid-19.

5. NAHB to report as lumber prices take flight again

It’s a quiet start to the week in the data calendar, with the main focus being on the National Association of Home Builders’ monthly survey. The survey comes as lumber returns to its highest level since last May amid renewed supply problems.

Lumber Futures were one of the most eye-catching elements of the commodities rally last year that first alerted markets to the inflationary dangers of too much stimulus in developed markets. Having risen from around $350 a ton to as much as $1,711 and then falling back to $454, lumber is now trading at over $1,300 a ton only 24% off its 2021 peak.

The New York Federal Reserve will separately release the Empire State Manufacturing Index at 8:30 AM ET.

Bonds at 2-Year High, Oil at 7-Year High; Goldman Earnings – What’s Moving Markets