Markets limp towards Yellen’s Friday speech

Markets began to lurch slightly lower overnight as traders started positioning in case Janet Yellen follows in Stanley Fischer’s recent hawkish tone in her speech on Friday.

Some of the DXY US dollar index's gains overnight were pared back after US existing home sales disappointed market expectations - it still closed up 0.2%.

DXY
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The Bloomberg commodity index did not fare well in the rising US dollar environment overnight, dropping 1.2%. Copper continued to slide a further 1.7%. But WTI oil also sold off heavily, losing 2.7% as the EIA inventories followed the API numbers seeing crude oil inventories increase by 2.5 million barrels largely cancelling out last week’s decline. To add fuel to the fire, Iran also said it had not decided on whether it would attend next month’s OPEC meeting in Algiers, even though Reuters reported it would yesterday.

Emerging markets certainly appear to be struggling this week as fears of a hawkish turn from the Federal Reserve (Fed) have halted their rallies. Global bond fund allocations towards emerging markets have reached their highest levels in four years according to Morningstar’s data. The heightened low yield environment in the wake of Brexit has seen investors seeking out yield and piling into emerging market carry trades with little consideration for the some of the messy situations these countries find themselves in. Concerns about the police investigating South Africa’s finance minister, and worries about Turkey’s newly launched major military campaign in Syria have continued to sap sentiment in emerging markets.

Concerns about future Fed policy and the pullback in commodity prices are taking their toll with the EEM iShares MSCI Emerging Markets ETF losing 2.3% over the past week.

The Asian session looks like it will struggle at the open after a poor close from US markets. Low volumes and cautious trade are like to dictate markets in the lead up to Janet Yellen’s speech on Friday. The ASX is set to open slightly lower with the materials and energy sectors looking set for a tough day. BHP’s ADR dropped 2.2% overnight while CBA’s has a relatively muted session.

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