Overnight Headlines

*USD hits the highest level in more than two weeks on firmer yields

*US stocks closed mixed on concerns over the Delta variant

*Oil stabilises after falling more than 6% over the last two trading days

USD built on NFP gains driven by higher US interest rates and falling commodity prices. EUR/USD sustained the move beneath 1.18 and below near-term support at 1.1751. USD/JPY is edging close to two-week highs with next near-term resistance at 110.69. GBP/USD has slipped out of its recent range and through support at 1.3872.

US equities ended mixed with modest moves and yield sensitive banks faring best. Energy was the big faller on continued selling in oil. Nasdaq beat the broad trend closing marginally higher, but it was a slow start to the week. The mixed picture is continuing in Asia this morning with US futures signalling a small setback on the open so far.

Market Thoughts – More Fed comments

Fed officials have been on the wires overnight with two voters sounding pretty positive on the Fed’s next steps. Bostic said the central bank should start tapering if we see another month or two of strong jobs growth. This would fulfil the “substantial progress” goal. He also argued for swift and faster tapering than in past episodes.

Barkin said high inflation this year may have satisfied one of the Fed’s benchmarks for raising rates. But there is still room for the job market to heal before rates should rise. These comments weighed on US Treasury bonds with 10-year yields rising above 1.30% for the first time since mid-July. The first hike is now fully priced in for the first quarter of 2023. DXY is bid and aiming for the July high at 93.19 ahead of the year-to-date high at 93.43.

Chart of the Day – Oil steadies after heavy losses

We focused on gold yesterday due to the price action but could equally have picked oil as a chart of interest. The stronger USD, growing taper expectations and continued concerns over the spread of the Delta variant are weighing on commodities and especially oil. Fears around potential global demand are to the fore. New restrictions in China, the world’s second largest oil consumer, are raising increasing concerns about the short-term outlook.

Brent broke down through the 100-day SMA yesterday and neared the July support zone around $68. But prices touched the lower Keltner channel and have retraced back to the moving average today. China is of course a demand risk, but strong government action may mean these risks are short term and this is a buying opportunity.