Dollar Bulls Look for Support Signals

Tuesday April 24: Five things the markets are talking about

U.S dollar bulls seem to have finally found some much needed support from interest rates as U.S bond yields climb toward levels unseen in nearly four-years.

The ‘mighty’ dollar recorded a three-month high yesterday as 10-year note traded atop of the psychological +3% at +2.998% – a key level that tech analysts believe keeps the door ajar for much higher yields.

Overnight, capital markets have hit the bond pause selloff button that took sovereign rates to key threshold levels. Global equities have traded mixed as earning’s season picks up. The dollar is little changed; sitting atop of New Year high’s while commodity prices ease.

On tap: For today, the market is expecting some more positive data – U.S consumer confidence and new home sales (10:00 am EDT).

2. Stocks mixed results

In Japan, equities hit a two-month closing high overnight with financials leading the gains after U.S yields spiked to four-year highs and, as investors remained optimistic about upcoming earnings. The Nikkei advanced +0.86%, while the broader Topix ended +1.08% higher.

Down-under, Aussie shares rallied on Tuesday, driven by banks as benign inflation data backed expectations interest rates will remain accommodative for some time. However, gains are being capped by losses in materials on an extended slide in aluminum prices. The S&P/ASX 200 index ended up +0.6%. In S. Korea, the Kospi declined -0.4%, its third consecutive decline.

In Hong Kong, shares ended lower, led by tech stocks over trade-spat worries. Both the Hang Seng index and the China Enterprises Index closed -0.5% lower.

In China, stocks post best gains in two-months as Beijing vows to hit economic targets. The blue-chip CSI300 index and the Shanghai Composite Index climbed +2%.

In Europe, regional indices are trading mostly higher across the board following a plethora os earnings reports – shares of SAP are helping the DAX.

U.S stocks are set to open in the black (+0.4%).

Indices: Stoxx600 +0.2% at 383.8, FTSE +0.4% at 7427, DAX +0.4% at 12621, CAC-40 flat at 5440, IBEX-35 -0.1% at 9914, FTSE MIB -0.1% at 23954, SMI +0.1% at 8814, S&P 500 Futures +0.4%

2. Brent hits highest in four-years as supplies tightens, gold up

Crude oil prices have rallied for a sixth day overnight to hit its highest price in four-years, supported by expectations that supplies will tighten just as demand reaches record levels.

Brent crude futures are at +$75.07 a barrel, up +36c, or +0.5% from Monday’s close.

Note: Brent’s six-day rising streak is the longest such string of gains since December, with prices up more than +20% from 2018-lows recorded in February.

U.S West Texas Intermediate (WTI) crude futures are at +$69.17 a barrel, up +53c, or +0.8%.

Markets have been lifted by supply cuts led by the OPEC and the possibility of renewed U.S sanctions against Iran.

Note: The U.S has until May 12 to decide whether it will leave the Iran nuclear deal and re-impose sanctions against OPEC’s third-largest producer.

Market prices are being capped by U.S production – higher crude prices are bringing more U.S producers back “on line.”

Gold prices have edged higher ahead of the U.S open, but the safe-haven demand is beginning to fade. After falling for three previous sessions, spot gold has edged up +0.2% to +$1,327.20 per ounce. That’s not far from Monday’s low of +$1,321.81, its weakest price in three-weeks. U.S gold futures have rallied +0.4% to +$1,329.20 per ounce.

3. Yields remain near four-year highs

The U.S 10-year Treasury yield remains within touching distance of the key psychological +3% handle. The yield on U.S 10’s has eased -1 bps to +2.96%.

Elsewhere, sovereign yields have eased a tad ahead of the U.S open on profit taking.

Nevertheless, higher U.S yields are supporting many regional yields. Germany’s 10-year Bund yield has eased -2 bps to +0.62%, the largest tumble in a week, while the U.K’s 10-year Gilt yield has declined -3 bps to +1.539%.

Note: The last time yields traded atop of current yield levels it hurt investor risk appetite and sent equities tumbling. It also came shortly before crude oil prices plummeted -75%.

The European Central Bank (ECB) guidance later this week (April 26), about the future of its stimulus programme, is the next thing that may cause some yield movement.

Last Friday, ECB’s Draghi said he was confident that the inflation outlook has picked up, but uncertainties “warrant patience, persistence and prudence.”

4. Dollar steadies, looking for clues

Recent commodity price have sparked fears of a stronger rise in inflation and, consequently, a faster rise in interest rates and it’s these higher yields that is supporting the ‘big’ dollar.

EUR/USD (€1.2202) is holding, trading atop of key support levels ahead of Thursday’s ECB meeting. Euro policy makers have to digest recent economic downside surprises in the various recent economic releases. German Ifo survey (see below) continues to show the recent spat of disappointing numbers.

Elsewhere, USD/JPY is holding below the ¥109 level at ¥108.81, while GBP/USD is at £1.3942 ahead of the U.S open.

5. German Ifo business climate falls

Euro data this morning showed that German business sentiment slipped further this month, as manufacturers cut back their business outlook.

The revamped German Ifo business climate index, which now also includes the service sector, fell to 102.1 points from 103.3 points in March, below market expectations of 102.6 points.

Note: It marks the fifth consecutive decline in the indicator.

The survey follows a string of soft economic data, pointing to a slowdown in economic activity in Q1.

Yesterday’s German PMI data surprised on the upside, as the downtrend in the PMI’s came to a halt this month.

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