Overnight Headlines

*Brent crude oil climbs to 2014 high as geopolitical unrest returns

*Bank of Japan raises price forecast, keeps policy options steady

*UK inflation set to hit 30-year high as rate rise expectations mount

*US equity futures fall in Asia after 10-year yield tops 1.85%

USD is rising for a third straight day after touching a two-month low on Friday at 94.63. EUR consolidated in a narrow range around 1.14. GBP slipped for a second day after failing to close above the 200-day SMA twice last week at 1.3735. USD/JPY looks to have stabilised as US yields pick up again, rebounding close to 115 after Friday’s plunge. Commodity-$s led the gains with USD/CAD back to the 200-day SMA at 1.25.

US equities were closed on Monday for the Martin Luther King holiday. Expectations of central bank tightening to fight persistent inflation are seeing equities generally struggle as investors rotate from growth to value stocks. Higher rates are hurting tech stocks especially, with the Nasdaq off 4.8% so far this year. The broader S&P500 has slipped 2.2%. Today, Asian markets are lower as US bond yields make new highs, with futures in the red.

Market Thoughts –Renewed upward pressure on bond yields

It had been a quiet start to the week with FX rangebound and the US closed yesterday. But bond market moves have again been volatile with the yields on the US two-year Treasury advancing above 1% for the first time since the pandemic began. Markets are now adjusting to a base case of four 25bp rate hikes by the Fed this year. This will see further underperformance in speculative areas of the market.

Rising oil prices have hit seven-year highs this morning and this will add to the inflationary picture. A stronger dollar and negative risk appetite would normally be bad for commodities. But crude continues to rise on global supply disruptions, renewed optimism about Omicron and recent geopolitical tensions.

Chart of the Day – USD/JPY rebounds sharply

After hitting highs at 116.35 last seen in January 2017, this major tumbled quickly, falling seven days out of eight until yesterday. The bullish break above the previous high at 115.52 could only be sustained for one day.

A notable hammer candlestick printed on Friday after sinking to a three-week low at 113.48. This is a bullish trading pattern as buyers absorbed the selling pressure and then pushed the market back near to the opening price. We are now sitting on the trendline from the September low. Bulls will look to the previous high at 115.52, and beyond if bond yields continue to rise.