Markets
US equities are trading lower Wednesday, alongside a 10bp rise in 10-year Treasury yields, coming on the back of a surprising rate hike from the Bank of Canada, perhaps foreshadowed by the RBA's concerns around inflation. After all, the central banks often chat with each other. And that may highlight for some investors how diligently global central banks are paying attention to sticky inflation and buoyant growth -- all coming just ahead of this next week's scheduled Fed meeting.
Hence investors are showing signs of apprehension heading into next week's Fed meeting and US CPI report. Unfortunately, these high-risk events are now framed by a possible liquidity event as the US Treasury's T-Bill deluge to replenish their TGA coffers is creating some additional jitters. While the dollar amount of issuance is well known, the range of possible liquidity entanglements is less transparent.
US Bonds sprang to life with yields on 10-year Treasuries climbing to 3.80% -- at its post-March high (when the Regional Bank turmoil put a temporary damper on yields). However, the move higher in yields overnight does not appear to be tied to anything happening in the US as much as the central bank's actions north of the border. Canada raised its lending rate by 25 bp in a mostly unexpected move. And in Australia, some bank economists added another two 25bp rate hikes to their summer forecast for the RBA following a speech by a central banker and data indicating that the labour market there remains tight.
The S&P 500 sector most exposed to rates -- Tech -- is trading lower on the back of the sharp increase in 10-year yields. Six of the 7 mega-cap Tech stocks are down ~1%-3.5% overnight, with only TSLA shares rising. And in a market where these 7 stocks comprise more than 50% of the S&P 500 market cap, it is perhaps not surprising to see the index trade down as rates rise.
Oil
A higher interest rate environment is typically bad news for commodities, given it tends to slow growth, so Oil prices fell after the Bank of Canada rate hike triggered a bout of knock-on hawkish risks along the sovereign yield curve, at least for those countries that central banks can and are willing to hike rates.
Forex
Looking at the two main dollar protagonists, the EURUSD is trading off the New York highs as current actual activity has a way of catching up with lofty sentiment.
While over here in Asia, the CNH is predictably weaker after yesterday's trade data. Traders expect the trade surplus to narrow in the coming months as geopolitical risks heat up further and the US and Japan source alternative ASEAN supply chains. And when together with a widening services deficit, it is an FX-negative development. More broadly, risks are skewed towards further CNY weakness unless there is a more robust and credible policy response than is currently evident.
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