To the scoreboard:
Dow: 21,454.61 +143.95 (+0.68%)
S&P 500: 2,440.69 +21.31 (+0.76%)
AUD/USD: 0.7640 +0.0053 (+0.75%)
ASX200 SPI futures (Sept contracts): 5,736 (+40)
Iron ore benchmark 62% fines: $US62.33 (+4.4%)
1. Currencies hop aboard the central bank roller coaster: The Euro dipped back below $US1.13 after an attempt to pour cold water on inflation expectations, with sources saying that ECB president Mario Draghi had not intended to signal policy tightening in his speech yesterday. That didn’t last long though, with traders bidding the currency back up to a one year high. Then it was Bank of England governor Mark Carney’s turn to surprise the market by hinting that the BOE would raise rates if business investment increased, and that drove the pound above $US1.29.
2. The Aussie rocketed: The Aussie dollar hit a 3-month high overnight, reaching around US76.4 cents which is the top of its recent range. Support in that range could see it climb above US77 cents. The AUD benefited overnight from more US dollar weakness and a good session for commodities. The USD index is now only just holding above 96, with traders focused on a bullish Euro theme and the recent weakness in US data points. Data was light overnight but new homes sales in the US missed expectations.
3. Equities higher: Bullish sentiment extended to the stock market, as “buy the dip” prevailed and US stocks led gains with the NASDAQ reversing yesterday’s falls. The hawkish tone from central banks also drove a rise in financial stocks on the prospect of higher short term interest rates. Overnight price action sets the ASX200 up nicely this morning after yesterday’s impressive gains, when the index climbed by 41 points coming off a weaker lead from global markets.
4. Iron ore is on a tear: It was another barnstorming session for iron ore, which would be helping to boost both the ASX and the Aussie dollar. Spot prices for benchmark 62% fines are back over $US60 a tonne. Oil also found more support, climbing by more than 1% which suggests that benchmark crude’s dip below $US45 a barrel last week marks the recent price floor. Oil fell despite a weaker than expected draw-down of US oil inventory, with traders more focused on lower production numbers.
5. A quick look at bonds: Longer-term US bond yields diverged slightly overnight from 2-year notes which saw more demand, but the yield curve remains flat and the bond market continues to be slightly at odds with other asset classes in the outlook for the US economy. The Wall Street Journal reports that at their current level of 2.23%, the yield on US 10-year treasuries is still lower than what it was before the US Federal Reserve’s first rate rise in its current tightening cycle in December 2015.
6. High-yield stock investors are staying put: In addition to the bond market, not all equity investors are convinced about the US Federal Reserve’s current plans to normalise monetary policy. This post from Joe Ciolli notes that companies which provide a reliable dividend yield, like telecom and utility stocks, have seen significantly lower capital outflows this year than other industries. It means that investors still see high yielding stocks as an effective proxy for lower bond yields, on the expectation that interest rates will remain compressed.