Overnight Headlines

*USD holding near recent peak, highest since mid-April

*US equities suffered their worst week since February, futures lower

*Bond yields continue to sink, US 10-year now 1.40%

USD registered its best week since last September as the squeeze on consensus USD shorts continues to cause alot of pain. The DXY jumped 1.8% on the week to the highest level in over two months. All major currencies fell versus “King Dollar”, ranging from 0.5% in JPY to as much as 3.8% for the NOK. EUR took out big figure support and closed down 1.9% on the week, while AUD tumbled close to 3% and the lowest levels since last December.

US equities suffered their worst week in nearly four months, with investors fleeing from “reflation trade” stocks or those that benefit from higher inflation. Asian markets are hurting too with European bourses opening up firmly in the red. The reality shock of a shifting Fed saw energy and utilities sink, and financials became the biggest underperformer last week with bond yields selling off sharply. The Nasdaq appears the most resilient dropping a mere 0.3% on the week compared to -3.5% for the Dow and -1.9% in the S&P500.

Market Thoughts – Will the Fed fallout continue?

With doubts over how much inflationary pressure the Fed is now really willing to tolerate, markets are still adjusting to this about-turn by Powell & co. The FOMC are now well advanced of the “talking about talking about tapering” phase everyone was debating last week with discussions on cutting bond purchases now supposedly squarely out in the open. We will hear from numerous Fed officials including Powell this week to see if they back up last week’s volte-face.

Some are now questioning if the Fed’s relatively new average inflation targeting policy was really just some other form of forward guidance that would be dropped on the first flare up in inflation. Bonds markets are reacting that way (short end yields up, long-end down) which potentially points to earlier hiking but a lower end rate. In the meantime, the dollar direction depends to some extent on the Fed speakers, with Bullard and Kaplan first up on the roster this afternoon.  

Chart of the Day – Tumbling gold

Metals markets got a double whammy last week from the hawkish Fed and surging dollar, plus Chinese intervention to try to stem input price pressures. For example, copper was down more than 8% on the week hitting its lowest level since mid-April. Meanwhile, gold tumbled 6%, the biggest loss since March as the surging USD and short-end rates dented appeal for the bullion.

Prices scythed through both the 200-day and 100-day SMAs with the latter now first resistance above at $1796 which is near the 50% retrace level around the big figure, ahead of the longer moving average at $1838. Momentum is now oversold on the RSI but can still continue, with bears targeting a stronger move through the Fib level at $1768 which has supported prices so far today and last Friday, towards the March high / late April low at $1755.