Overnight Headlines

*Asian stocks in defensive mood on China and rate worries

*Fed’s Bullard won’t rule out a 75bp hike, sees terminal rate at 3.5%

*DXY pierced 101 to the upside, JPY the clear laggard

*Goldman Sachs sees US recession odds at 35% in the next two years

US equities swung between gains and losses before closing marginally in the red. Materials and energy continued to outperform. Expensive defensive stocks like healthcare lost ground. US Treasury yields touched 3-year highs as the curve steepened after inverting earlier this month. The 30-year yield reached 2.969%, just shy of the key 3% level. US stock futures are pointing to a positive open.

USD rose to a fresh two-year high in thin and choppy trading. DXY remained firm and has pushed above 101 this morning. EUR fell beneath the 1.08 handle just shy of last week’s low at 1.0757. GBP held marginally above 1.30 but is trading just below today. USD/JPY continued its ascent and printed a new 20-year high at 128.32 this morning. AUD is firmer after hawkish RBA minutes and recent upside in oil prices.

Market Thoughts – Perfect storm continues to lash the yen

The yen remains the whipping currency of choice. It is down over 5% this month alone and more than 10% lower on the year against the dollar.  We had more jawboning by Japanese officials overnight, this time by finance minister Suzuki. He suggested the demerits from yen weakening were greater than any merits under the current circumstances.  

High energy prices and increasing global yields are weighing heavily on JPY. Any intervention to support the currency is at odds with the BoJ’s easy monetary policy. The key level appears to be 130 with more jawboning as we near that mark. The chance of a 75bp rate hike was raised by the Fed’s Bullard, pushing yields to multi-month highs. The rest of the Fed is not there yet but some officials may not be far behind.

Chart of the Day – Gold seesaws higher and back into the range

Investors are grappling with concerns over a weakening global economy coupled with rampant inflation. Gold typically advances in periods of uncertainty and rose as much as 1.2% yesterday. It hit $1998, the highest level in more than a month, before falling back to $1977.

Large-scale Chinese and central bank purchases have recently supported the precious metal. But the Fed is signalling its intent to reach neutral rates by year-end and start quantitative tightening. Short positioning is low currently, so the $2000 level is key for more upside. Near-term support is $1960. If we lose this, we are back into the range above $1916.