Overnight Headlines

*USD stronger versus most G-10 currencies, DXY closed +0.37%

*US equities slightly lower, Nasdaq outperformed closing +0.2%

*US 10-year bond yields dropped to 1.34%, the lowest since February

USD turned higher again after selling off in the first part of Tuesday. DXY closed near three-month highs as the positive risk mood soured slightly and markets looked to the FOMC minutes from the surprisingly hawkish June meeting. Expectations for a bullish tone are also helping the greenback with the EUR dropping to a low of 1.1806 near its lowest since March. GBP gave up gains towards 1.39 and is back battling with 1.38.

US equities stumbled with even the S&P500 breaking a seven-day streak of gains. Falling bond yields saw growth stocks outperform while value names and the Dow (-0.6%) sunk with financials, materials and energy all lower. Tech led the way with the Nasdaq in positive territory and futures are in the green. Risk off is continuing in Asia with most markets lower and European bourses set to open modestly higher.

Market Thoughts – Reality bites, focus on Fed minutes

After last week’s flurry of record close upon record close in stocks, in some ways it’s inevitable/laughable that when equity markets move lower, markets get a chill and reasons are needed for the shifting mood. Was Wall Street unsettled by the ISM survey showing a slight cooling in the red-hot services sector, with a reading still above 60? Or was it the Chinese crackdown on tech companies helping risk aversion while its own PMI in both manufacturing and services disappoints?

We could just point to concerns over the Delta variant (and how the UK has become a testbed for what happens when infection cases go to the moon, but two-thirds of the adult population are vaccinated, and potentially mean millions having to self-isolate).

Most instructive is the big bond move which is the largest decline in yields since February. This points to lower inflation and a less strong economy that doesn’t need higher rates to rein it in. We will hear the Fed’s views from its June meeting later today, though a lot of members have been on the wires since then.  It seems that markets are again worried about growth going forward now that the easy part, more so in the US, is behind us.

Chart of the Day – Gold bounce continues

Gold trades on the interplay between inflation and interest rates. As the market has increasingly gone along with the Fed’s transitory inflation line, rates are expected to stay lower for longer. In turn, real yields which account for inflation have begun to fall again and touched -1% overnight. This is certainly good for an asset which yields nothing although the rising dollar has slowed the yellow metal’s advance and any hawkish noises from the Fed minutes tonight may not help the bugs. On the flip side, central banks have been buying gold in recent months and there is an increasing risk of equity market volatility which should favour safe-haven gold demand.

After hitting a low at the end of last month at $1750, prices have bounced and are now up for a sixth straight day. Gold bugs broke through the 100-day SMA on Monday so that offers first support at $1790 and with bullish momentum finally picking up on the MACD, bulls will target yesterday’s spike high at $1815 and then the 200-day SMA at $1828.