US dollar strengthened as the bond selloff intensified

Quick Recap

Bonds – just 5 letters that can derail global markets.

It’s almost always been the case that bond market ructions are what derails stock markets with the GFC and its cause the best example. So I continue to watch the moves in US and German bonds (bunds) very closely. That’s because – as Soc Gen put it this morning – “the headline deflation spell – that lasted all of four months – is now behind us.”  That means the focus is on the changed inflation outlook around the globe but particularly in the US.

Indeed on SkyBusiness last Wednesday I was asked about US interest rates and I said that zero was incompatible with where the US economy is sitting at the moment. That’s a point made strongly by Wells Capital Management’s Jim Paulsen in a research not I covered for Business Insider last night. I’ve written a piece which uses  6 of his charts that will convince you the Fed must raise rates in 2015.

That’s important because although at the oment I have a target of 1.15 for this EURUSD move eventually it also means that the US dollar is likely to get a lift once more. More concerning, in terms of global market impact, is the effect of Fed moves on stocks. We’ll see.

Looking back to Friday however as I said at BI this morning:

The end of the week trade on US stock markets was much stronger than the previous day with rises of more than 1% across the three big indices. Much of Europe was closed for May Day but traders in London took the FTSE slighthly higher. The US dollar got a little of its mojo back, sterling was hammered on concerns about this week’s general election and the US 10 year bonds rose sharply finishing at 2.12%. Global bond markets need to be watched closely – they and the Fed can eventually derail the stock market.

Also worth noting is that on Friday ” San Francisco Fed Chair John Williams said June could still be a “live” meeting for a change in policy given that the FOMC “will have two more months of economic data” before the decision needs to be made. He also highlighted the fact that the dollar and oil don’t even need to move from where they are for inflation to “move back up.”

It might be srping in the US and Europe but winter might be coming to bnd markets and that measn trouble for many asset classes.

On the day

On the data front today we get TD inflation in Australia along with ANZ job ads and ABS building permits. In China we get HSBC manufacturing PMI as well as a raft of similar HSBC/Markit PMI’s around the globe.

Here’s the overnight scoreboard (8.45am AEST):

• Dow Jones up 1.03% to 18,024
• Nasdaq up 1.29% to 5,005
• S&P 500 up 1.09% to 2,108
• London (FTSE 100) up 0.36% to 6,985
• Frankfurt (DAX) closed
• Paris (CAC)closed
• Tokyo (Nikkei) up 0.06% to 19,351
• Shanghai (composite) closed
• Hong Kong (Hang Seng) closed
• ASX Futures (SPI June) +34 to 5,833
• AUDUSD: 0.7841
• EURUSD: 1.1187
• USDJPY: 120.21
• GBPUSD: 1.5149
• USDCAD: 1.2155
• Crude: $59.24
• Gold: $1,177.80

CHART OF THE DAY:

EURUSD – 4 hour: Looking for a continued pullback from high. The marginal new high Friday night before the pullback looks a little like a head fake for now. So we have a clash of time frames with weeklies looking good but 4 hour looking overcooked and dailies stalling.

1.1161 is support, then 1.11 and solid support at 1.1050.

ASX200: I said Friday trade the range – that’s the way to play it. Unitl it breaks.