On Tuesday, the yield on 10-year U.S. Treasury securities hit a three-month high of 1.5 percent, and the interest rate on 5-year paper rose above 1 percent for the first time since February 2020. What could have caused the changes? After last week's FOMC meeting, investors may have assumed that the Federal Reserve would soon begin tapering fiscal stimulus.
As a result, U.S. stock indexes traded on Wall Street closed Tuesday sharply below the previous day's levels. The Nasdaq fell 2.8 percent, the most since March, the S&P 500 fell 2 percent and the Dow Jones fell nearly 570 points to 34440.
The indices may also be negatively affected by the information coming from the U.S. Department of Treasury, which is headed by former Fed Chair Janet Yellen. In her opinion, it is necessary to raise or suspend the US debt limit as soon as possible, because the money for the operation of the federal government is already running out. In an extreme scenario, investors have even started to play up the possibility of not paying some of their obligations on time, like the Chinese developer Evergrande. American politicians still cannot come to an agreement, and the money of the state administration will run out in two days and the so-called government shutdown may occur.
Meanwhile, Jerome Powell, Fed Chairman, in his speech to the US Senate said that the economy has already met all the criteria for tapering. However, there is still a long way to go before maximum employment is restored.
Dollar getting more expensive
The dollar index remained at 93.7 points on Wednesday, which may translate into EUR/USD below 1.1700, and the main reason for the strength of the USD could be considered the increase in Treasury bond yields. James Bullard, chairman of the St. Louis Federal Reserve, said that a slightly more aggressive Fed will ensure a longer expansion, with two interest rate hikes in 2022 and keeping inflation at 2.8 percent until next year. Governor Lael Brainard, for her part, said the labor market may soon reach its tapering target, while New York Fed President John Williams noted that a reduction in bond buying may soon be warranted.
Oil price in correction
WTI crude oil futures fell 1.4 percent on Wednesday to around $74 per barrel. This may have occurred due to renewed concerns about global demand recovery after the pandemic. In the U.S., economic activity has fallen in recent months as funding for pandemic relief has weakened and infections from the delta virus strain have intensified.
Goldman Sachs cut its forecast for China's economic growth this year to 7.8 percent from an earlier 8.2 percent, citing constraints on energy consumption.
U.S. crude oil remains near its highest levels since January amid lower supply as U.S. rig activity still hasn't reached pre-hurricane levels and EIA crude inventories shrank to a three-year low of 414 million barrels last week.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
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