Futures contracts on major stock indices start the week trading in the red. Investors' attention may be drawn to U.S. Treasury bonds, whose yields are rising very rapidly, which could negatively affect the stock market.
The yield on the 10-year U.S. Treasury bond rose to 1.37 percent on Monday, reaching a new one-year high. This may have occurred due to inflationary concerns stemming from strong economic activity and further fiscal stimulus. Nevertheless, Fed officials recently reiterated that they expect inflation to pick up and that they remain prepared to maintain loose monetary policy. In contrast, the yield on the 30-year bond has risen to 2.14 percent, meaning that it is trading higher than U.S. inflation and therefore has a positive real interest rate. Meanwhile, the yield curve, or the difference between the yields on 5-year and 30-year bonds, has reached its highest level in more than five years. This in turn may reflect expectations for faster economic growth and accelerating inflation.
It appears that this could be a short-term factor, causing futures on major stock indexes in the U.S., but also in Europe, to start the week in the red, with contracts appearing to be down between 0.5 percent and more than 1 percent. Traders are concerned that high bond yields could hurt companies that depend on easy borrowing and lead to less favorable valuation models for some tech stocks. Meanwhile, the House of Representatives is on track to pass President Joe Biden's proposed $1.9 trillion relief package for the U.S. economy by the end of this week, with the Senate expected to vote next week. There are also indications that another trillion-dollar package could be proposed in March.
Will the oil market stabilize? Frosts are letting up in the state of Texas, which could cause production to resume. However, preliminary information suggests that it may still take a few weeks before everything returns to the way it was before the sudden onslaught of winter.
Winter weather in the U.S. has also led to delays in the delivery of the COVID-19 vaccine, but there are reports that about a third of the doses from the delayed delivery were delivered over the weekend. This news may in turn benefit oil demand. Investors in the oil market were already anticipating an improvement in demand sentiment, which, along with OPEC-led output cuts earlier this month, drove prices to pre-pandemic levels, with WTI crude surpassing $60 per barrel at the time. Investors are now awaiting the next OPEC+ meeting on March 4, where the cartel is expected to discuss April production limits.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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