To the scoreboard:
Dow: 21,374.56 +46.09 (0.22%)
S&P 500: 2,437.92 -2.43 (-0.10%)
AUD/USD: 0.7586 +0.0048 (+0.64%)
ASX200 SPI futures (June contracts): 5,755 (-32)
Iron ore benchmark 62% fines: $US54.43/t (+2%)
1. Hawkish Fed: The US Federal Reserve raised the benchmark interest rate to 1.25%. The US dollar index rallied on the news, but it finished square for the day after catching up on earlier losses as retail sales and inflation data both missed expectations. Despite a recent run of poor data the Fed remains upbeat, arguing that recent softness will turn out to be largely once-off in nature and position itself to unwind its bond purchase program later in the year. Find the full Fed statement here.
2. But bond market not convinced: There’s an increasing disconnect on the outlook for the economy between the bond market and the US Fed. The Fed remains somewhat hawkish in its outlook, predicting a rise in inflation that’s yet to come and ignoring recent data. Despite the rate increase, the yield on US 10-year treasuries fell by around 8 basis points to 2.13%. It was part of a global bond rally, and Aussie bonds also saw particularly heavy demand to fall well below their recent range of 2.4%.
3. Aussie is up and about: The AUD is holding strong after climbing above US76 cents on the back of strong data from China. It retreated slightly after the Fed hiked rates but was still the best performer among G10 currencies overnight along with the Kiwi dollar. On the ASX200, futures traders have marked the local index down by 32 points after two days of strong gains, ahead of key employment data today at 11:30am AEST. Business Insider’s guide to the employment report is here.
4. Oil price craters on supply glut: Oil got smashed again on yet another miss by the US Energy Information Agency’s inventory report. Weekly oil barrel draws were at 1.6 million against 2.7 million forecast, and combined with a build in gasoline inventories, that was the catalyst for heavy downward pressure on oil prices. Benchmark crude and West Texas were both down more than 3%, as Reuters reported that oil supply is expected to outpace demand in 2018.
5. Iron ore battles in choppy seas: Iron ore’s recent fluctuations continue, with benchmark 62% fines rising by 2% overnight on another lead from steel rebar prices. Futures trading overnight suggests that the gains will again be short-lived, with both iron ore and steel rebar falling back. Traders will be watching for further weakness in today’s futures session from 11am to 3pm AEST, which will point to another fall in spot prices later this evening.
6. Beware the VIX: The CBOE Volatility Index (VIX) continues to trade around a record low of 10 against its historical average of around 20. A combination of Federal Bank stimulus and the rise of huge passive investment funds which rarely sell shares has contributed to the low volatility, but it may not last. JP Morgan’s global head of macro strategy has warned that short positions in the VIX are increasingly at risk of big losses with volatility set to rise as interest rates go up and stimulus is wound back.