• The Federal Reserve’s hawkish shift sent ripples through the capital markets, weighing on stocks and bonds and lifting the US dollar.
• The Fed lifted the rate it pays on reserves (required and excess) and the reverse repo by 5 bp. It may not impact volumes of the reverse repo, but it may prevent further slippage in the Fed funds rate.
• Follow-through dollar buying is testing key retracement levels against the major currencies and the JP Morgan Emerging Market Currency Index is lower for the fourth consecutive session.
• Norway’s central bank has fine-tuned its message and now anticipates a hike in September.
• China, like the US, is taking steps to develop a domestic semiconductor chip fabrication capacity.
• Australia’s May jobs report was much stronger than expected and this will likely allow for a policy adjustment next month.
• Brazil delivered the much anticipated 75 bp hike yesterday, its third of this size in a row and signaled another one is likely in August.
A more hawkish than expected Federal Reserve sent the US dollar and interest rates higher and spurred an equity sell-off. The knock-on effect sent ripples through the capital markets today. Most equity markets in the Asia Pacific region fell. China, Hong Kong, and Taiwan were notable exceptions. Europe’s Dow Jones Stoxx 600 is snapping a nine-day advance, with losses led by information technology and utilities. Financials and energy sectors are posting modest gains. US futures are off around 0.3%-0.5%.
The US 10-year yield jumped eight basis points yesterday, the most in three months. It is slightly softer today, around 1.56%. European yields are 3-5 bp higher, while strong data from Australia (jobs) and New Zealand (Q1 GDP) saw benchmark 10-year rates jump 9 and 13 basis points, respectively.
The dollar remains firm, but the Antipodean currencies and yen are showing some resilience. Emerging market currencies are lower, and the JP Morgan Emerging Market Currency Index is off for the fifth consecutive session.
Gold, which had been probing $1900 at the end of last week, is now flirting with support near $1800. Iron ore prices are lower for the second day, while steel rebar fell for a third session. Copper prices are lower for the third time this week. A larger than expected draw of US inventories (-7.3 mln barrels) may be helping limit oil’s pullback. July WTI has backed off from testing $73 but remains above $71.
Bannockburn Global Forex