The US dollar wins amongst FX majors

Markets

Don’t be blinded by market talks that US Treasury Secretary Yellen triggered yesterday’s risk sell-off. Most of the intraday harm had already been done ahead of her comment that “it may be that interest rates have to rise somewhat to make sure our economy doesn’t overheat”. She later stressed Fed independence and that the remark was linked to proposed future spending on welfare and infrastructure (over the next decade) rather than the fiscal stimulus enacted this year. She continued downplaying everything she said earlier by repeating Powell’s transitory higher inflation tune. Anyway, Yellen’s slip of the tongue as dovish ex-Fed president might be a wake-up call to some that will be linked to Powell’s comments on froth at last week’s press conference. Now turning back to intraday market action: main US indices traded over 1% down by the time of her interest rate comment. They set an intraday low in the aftermath but the move lacked additional selling. Instead, markets bottomed and even reversed some in the losses going into the close. The Dow Jones eventually closed flat with S&P and Nasdaq respectively ceding 0.67% and 1.88%. The most worrying thing about yesterday is the spontaneous correction in US tech. The Nasdaq set a minor new record high at the end of April (Powell froth comment +1), but didn’t explore that space like it did in the past. This week’s price action is rather ugly from a technical point of view and suggest more corrective downside ahead. The same is true for European indices who admittedly closed at the time of US intraday lows. Nevertheless, the German Dax and EuroStoxx 50 for example closed below the neckline of double top formations and dropping out of the March/April upward trend channel. These deteriorating technical pictures also suggest more room for downward correction and will put the ruling buy-on-dips pattern for a test.

Core bonds thrived in yesterday’s risk-off conditions. US Treasuries underperformed as they showed a similar intraday U-turn as stocks after the European close. The US yield curve bull flattened with yields losing 0.1 bp (2-yr) to 2.2 bps (30-yr). The German yield curve moved in similar fashion with yields dropping by 1.1 bp (2-yr) to 4.3 bps (30-yr). 10-yr yield spread changes vs Germany widened marginally with Greece (+5 bps) underperforming. The US dollar won amongst FX majors, but gains remained modest. DXY closed at 91.29 from an 91 open, failing to take out minor first resistance at 91.36. EUR/USD closed at 1.2014 from an 1.2064 open. Today’s eco calendar contains US ADP employment and non-manufacturing ISM. We fear they’ll play second fiddle to developments on stock markets. Risk sentiment will probably continue to set the tone via traditional risk correlations. Speeches by ECB and Fed governors are a wildcard for trading. The outcome of Madrid elections (huge blow to minority Socialist government) risks having longer term political consequences, but the short term impact on Spanish assets could be muted.

News headlines

New Zealand’s job market performed well during the first quarter of this year. Employment grew 0.6% q/q to be 0.3% higher than a year earlier. Expectations were for a more modest 0.3% q/q and slight decline of -0.1% y/y. Unemployment fell from 4.9% to 4.7% even as the participation rate rose a tad more than anticipated from 70.2% to 70.4%. The headline figures do mask the fact that only part-time jobs were added, hours worked actually fell and underutilization (including a.o. people seeking to work more hours) rose from 11.8% to 12.2%. The kiwi dollar strengthens slightly to NZD/USD 0.717.

Israeli PM Netanyahu failed to form a government before a deadline passed on midnight Tuesday. The president of Israel has three days to ask parliament to nominate one of its members to build a government or pick the head of another party himself. In the latter case, Lapid from the second-biggest Yesh Atid centrist party emerges as a potential candidate. Any ruling coalition needs support from the nationalist Yamina party. However, other than wanting to oust Netanyahu, the two parties don’t share a lot of views. A fifth election in two years looms.

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