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Shares found their way higher in New York, retracing most of the prior day’s losses. Interestingly the benchmark S&P 500 index rose alongside further steepening in the expected Fed rate hike trajectory.

Source: Bloomberg

Wall Street manages gains even as Fed outlook turns still more hawkish: The 2019 policy path implied in Fed Funds futures and the spread between two- and ten-year US Treasury yields marched higher in tandem with share prices. This marks a reversal of yesterday’s trading dynamics, where worries about speedy stimulus withdrawal appeared to hurt risk appetite. April’s upbeat industrial production data seems to have played a part in the change. Output posted a larger than expected gain of 0.7 percent and the March reading was revised to match, a notable upgrade from the originally reported 0.5 percent gain. That might have encouraged hopes that the economy is strong enough to sustain the upcoming rise in borrowing costs.

Euro drops as Italy’s League, Five-Star Movement haggle over joint government platform: The Euro continued to sink even as other major currencies mounted recovery against the US Dollar, with political risk seemingly behind the move. Indeed, the drop echoed a widening spread between German and Italian 10-year bond yields, reflecting a rising risk premium in lending to Rome versus Berlin. Markets turned jittery as the populist Five-Star Movement and the right-wing League negotiated a joint platform for a coalition government. Rumours suggesting it will include a demand that the ECB cancel a large chunk of Italian debt and even a withdrawal from the single currency unnerved investors. The selloff stalled after the leaders of the two parties talked down the likelihood that either proposal will be included in the new government’s official mandate, but a robust rebound was conspicuously absent.

Australian jobs data to inform RBA monetary policy bets: The path of Australian interest rates continues to drive speculation despite the central bank’s endless protestations against anything but the status quo in the near future. As much was on display yesterday as a slightly disappointing wages data sent the Aussie dollar lower alongside local bond yields, hinting the release marked a dovish shift in the RBA outlook. The spotlight now turns to April’s labour market statistics. The economy is expected to have added 20k jobs on net last month while the unemployment rate held steady at 5.5 percent. Leading surveys point to a robust pickup in service-sector hiring, putting it near levels seen in January. That might open the door for an upside surprise that shifts the market-implied timing of the first rate increase a bit forward. As it stands, a hike is expected no sooner than March 2019.

The S&P/ASX 200 index appears to have found some resistance at the 2018 opening range high of 6150: After climbing further still, the index recently reversed lower from 6146 and has since traded lower to 6,106 after yesterday’s 9-point gain. Despite the setback, futures argue that you should not count the uptrend as over just yet. Telstra continues to dominate the volume after banks cut forecasts for the telecommunications firm on the anticipation of falling dividends as earnings decline. On the other side of the spectrum is BHP Billiton where CEO, Andrew MacKenzie is taking advantage of the near-term catalyst of iron ore prices and a shale sale to return free cash flow to shareholders. Implied data from ADRs show BHP & Rio Tinto are set to open nearly 2% higher.   

The spot rate of the Australian Dollar is getting the best of many G10 currencies in early trading: When looking at short-term momentum studies like the Relative Strength Index, AUD/NZD & AUD/JPY are near the top of the leaderboard across nearly 30 currency pairs. Additionally, the US Dollar lost 0.6% to its Australian counterpart, helping it to the biggest rise since May 10 and recouping most of Tuesday's losses. In addition to Aussie strength, other commodity-anchored and emerging market currencies are having a strong morning after yesterday's shakeout.

US Rates are an up-and-coming concern according to RBA deputy governor Guy Debelle: The US may be on the fast track to rampant inflation, which is a view shared around the world of bond investors. Bond investors are nearly allergic to inflation as they eat away the purchasing power of fixed coupon payments, and the debt-funded US fiscal stimulus is seen stoking the bonfire of inflation further. Growing inflation fears on an international scale are best seen through the US Treasury proxy for cash, the three-month note. Its rate of return surpassed the dividend yield on the S&P 500 for the first time since 2008. Macquarie Group is also anticipating higher US yields, with the bank's strategists calling the end of the 'great bond bull market' that could see the rate on benchmark 10-year US Treasuries tap 4%.

Crude oil reversed losses earlier this morning as being short energy looks to be an exercise in futility:  Prices have held up despite EIA data showing that exports are surging out of the US. Resilience is all the more impressive considering the IEA cut its demand forecast for 2018 on the view that prices above $70/barrel will dampen consumption. Metals investors are likely wondering if it's worth keeping the faith in the yellow metal after gold fell below $1300/oz recently, hitting the lowest levels of the year against a backdrop of rising US Treasury yields and a strengthening US Dollar. Another concerning development for metals came from copper. The calendar spread of the spot-and three-month contract is showing plenty of supply, which is leading to contango and a lack of buying pressure despite anticipation for growth and inflation.

Market Data:

SPI futures moved 9.14 or 0.15% to 6106.96.

AUD/USD moved 0.0045 or 0.6% to 0.7517.

On Wall Street: Dow Jones 0.3%, S&P 500 0.45%, Nasdaq 0.69%.

In New York: BHP 1.72%, Rio 2.76%.

In Europe: Stoxx 50 -0.04%, FTSE 100 0.15%, CAC 40 0.26%, DAX 30 0.2%.

Spot Gold moved 0.14% to US$1292.28 an ounce.

Brent Crude moved 0.32% to US$78.68 a barrel.

US Crude Oil moved -0.27% to US$71.12 a barrel.

Iron Ore moved -0.31% to CNY483 a tonne.

LME Aluminum moved 0.34% to US$2327 a tonne.

LME Copper moved -1.12% to US$6808 a tonne.

10-Year Bond Yield: US 3.08%, Germany 0.61%, Australia 2.88%.


Written by: Ilya Spivak, Currency Strategist and Tyler Yell, CMT, Currency Strategist with DailyFX

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