Risk off as bond yields continue to go lower

Overnight Headlines

*USD extended gains and is hovering near three-month highs

*US equities rebounded with S&P500 closing at a record high, futures lower

*US 10-year bond yields dropped to 1.29%, the lowest since February

USD continued its appreciation with the DXY filling a gap from April. There was little reaction from the Fed minutes which indicated that officials want to establish a plan for the tapering of asset purchases this year though they weren’t ready to communicate a schedule just yet. EUR/USD settled lower at 1.1790 while GBP printed a “doji” candle closing at 1.3801 though is on the back foot this morning.  

US equities bounced back with the S&P500 closing at an all-time high for the eighth time in nine days. Cyclicals such as industrials and materials led the way with the Dow also up on the day while the Nasdaq closed flat. Asian markets are lower today hampered by rising Covid infections and Chinese tech. US and European stock futures are in the red.

Market Thoughts – Nothing new in Fed minutes

The much-anticipated minutes showed that the FOMC was not ready to scale back QE yet, but some members did see that conditions necessary for tapering seem to have been met earlier than forecast. They revealed more inflation concerns but slow growth in the labour market was holding the Fed back.

It seems likely that tapering of QE bond buys will happen this year but the form and speed it takes will be driven by the data. Although the minutes point to tapering starting in December, many expect the pressure to grow through the summer.

Chart of the Day – AUD/JPY on major support

Risk off sentiment has been growing this week as COVID cases continue to rise with the Delta variant and various countries continue with lockdowns in locations with higher cases. This environment has seen the yen go bid and is the strongest currency on the month.

AUD/JPY is a good risk on/off gauge and has sunk after spiking higher after the RBA meeting above 84. The 100-day SMA acted as solid resistance and the pair is now down at the lows seen after the Fed meeting. This support zone around 82 goes back to February with next levels below here coming in at the mid-January highs around 80.93/85.

Jamie DuttaAnalyst / Trader

"With extensive experience as a full time trader and financial market commentator, I have worked as a trader in top tier investment banks and trading houses, including Morgan Stanley and GAIN Capital trading Forex, Index derivatives. and Bonds. I combine technical analysis with a deep fundamental knowledge to identify trade set-ups. My real life experience allows me to break down the complexities of financial jargon and trading. This means everyone can better understand the compelling forces of greed and fear which are realised every day in countless ways across markets."

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