Daily Wrap Up 26 May 2022

26 May 2022 04:34 PM

Stocks rally, dollar slips

The mood in equity markets is upbeat following last night’s update from the Federal Reserve. Earlier this month the US central bank hiked interest rates by 50 basis points – meeting forecasts – and last night the minutes from that meeting were released. It was confirmed that most of the central bankers felt it might be appropriate to lift rates by 50 basis points again in June and July. In addition to that, some participants saw evidence that overall price pressures might not be worsening, should this turn to out to be the case across the board, it could be an early indication that inflation might be about to plateau. Even though, the Fed suggested that we might be in for another two large rate hikes in the coming months, overall, the minutes were not as hawkish as initially feared.

US equity markets are showing solid gains, the NASDAQ is the top performer as it is up 2.2%, while the broader S&P 500 is up 1.8%. European indices are being pulled higher by the positive sentiment in the US, the DAX and the CAC are both up over 1%. US bond yields have traded in a small range today, the 10-year yield is 2.74%. Keep in mind it hit 3% a few weeks ago, when traders feared the Fed were about to pursue a very hawkish policy. The fact the 10-year yield is substantially below the May peak, indicates the bond market is not factoring-in as many rate hikes as previously predicted.

On that note, the US dollar is a touch weaker, hence why EUR/USD is up. Now that it looks likely the ECB will lift rates in July, there appears to be a floor under the euro. Even though the Fed were not as hawkish as precited, and that the US dollar is in the red, gold is down on the day. Earlier this week, the yellow metal hit its highest mark in over two weeks amid the large pullback in the dollar, but buying appetite remains weak. Perhaps the overall risk-on mood in the markets is making the asset less appealing.

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