European Open: Futures point lower, rising yields remain key

Overnight moves across Asia were an extension of Wall Street’s theme - higher yields and lower equities. Yet currencies remain relatively unharmed.

Charts (1)

Asian Futures:

  • Australia's ASX 200 index fell by -57.3 points (-0.84%) to close at 6,760.70
  • Japan's Nikkei 225 index has fallen by -287.85 points (-0.95%) and currently trades at 29,380.34
  • Hong Kong's Hang Seng index has fallen by -731.09 points (-2.45%) and currently trades at 29,149.33

UK and Europe:

  • UK's FTSE 100 futures are currently down -32.5 points (-0.49%), the cash market is currently estimated to open at 6,642.97
  • Euro STOXX 50 futures are currently down -32 points (-0.86%), the cash market is currently estimated to open at 3,680.78
  • Germany's DAX futures are currently down -110 points (-0.78%), the cash market is currently estimated to open at 13,970.03

Wednesday US Close:

  • The Dow Jones Industrial fell -121.43 points (-0.39%) to close at 31,270.09
  • The S&P 500 index fell -50.57 points (-1.31%) to close at 3,819.72
  • The Nasdaq 100 index fell -376.62 points (-2.88%) to close at 12,683.33

US treasuries were weaker overnight, pushing the 10-year back towards 1.5% and the 30-year around 2.27%. Not wanting to miss out, Australian yields also pushed higher with the 3-year rising 2.2 bps to 1.5%, the 10-year rose 11 bps to 1.18% and the 30-year rose to 1.18%.

Given the RBA’s target for the 3-year is 1%, and they doubled bond purchases to $4 billion last week to prevent it from rising (which it has anyway) then one has to wonder how far RBA will take their QE program to defy bond vigilantes. It will clearly take a lot more than they are currently doing.

Nasdaq 100 futures fell over 1% with DAX, STOXX 50 and FTSE 100 futures following suit. It is a similar picture across Asia with Japanese equities leading the pack lower, with the Nikkei 225 falling -3%, China’s CSI 300 and Hang Seng futures falling around -2.5%. Australia’s SPI 200 futures seemingly got off lightly with a-1% decline. Now over to you, Europe.

The DAX saw a failed break to a new record high overnight and produced a doji back below the prior high. Given the pressure futures are under ahead of the open then our bias is to the short side whilst prices remain beneath 14,169 resistance.

Tight ranges for currency pairs

The volatility for equities failed to pass through to the forex market, with the majority of ranges for majors and crosses falling below 40% of their 10-day ATR (average true range). Despite the risk-off tone set by equities AUD/JPY and NZD/JPY were the strongest performers through most of the session. Typically, we would expect to see such pairs lower whilst equities fall. Although this really underscores the fact that rising yields are finally being seen as an ominous sign by equity traders which sit just off of record highs.

  • EUR/USD is treading water around 1.2050. Tuesday’s bullish hammer suggests demand around 1.2000 but yesterday’s high was capped by the 50-day eMA. We need to see a clear break of 1.2100 before our near-term bullish bias is restored.
  • EUR/GBP is trying to form support above 0.8616. Is appears to be oversold on the weekly charts and past week produced a volatile Doji, so momentum is at least trying to turn around. So over the near-term 0.8616 remains a pivotal area for bulls and bears.
  • GBP/USD remains in the lower half of yesterday’s small range. Our bias remains bullish above 1.3826 (or the bullish hammer low) but we need to see a break above 1.4000 before assuming bullish continuation.

GBP/JPY: Bulls have a break of 150 in view

GBP/JPY remains in a strong bullish trend on the daily chart and produced a solid swing low at 147.40. If we were to be picky we’re not a huge fan of the bearish hammer on the weekly chart, but this requires a break beneath 147.40 to confirm it as a reversal pattern anyway.

The hourly chart is using the 100-bar eMA as support and providing a series of higher lows. There are also several lower wicks (buying tails) around 149.00 to suggest strong demand around those levels, so we’re looking for a break higher. What is currently lacking is a burst of bullish momentum. With any luck we’ll see something along those lines after UK open.

  • The near-term bias is bullish above the 149.00 low
  • Bulls could use a break of the retracement line as a sign of bullish continuation
  • A break above 149.70 brings the 150.44 high into focus

Australia’s trade balance increases its surplus

With trade balance being a key input to GDP prices, then it all goes towards potentially lifting Q1 GDP in line with RBA’s expectations. Goods and services imports fell -2% whilst exports rose +6% to lift the trade balance surplus to 10.1 billion (or +0.65 billion above forecasts). This is exactly how an export-driven economy should work.

US House passes election reform bill

The move, which was a key legislative agenda for Democrats, could see an overhaul of voting rights and force an independent commission to redraw congressional districts. As long is it gets past the Senate. And that could be a close call as they’ll need two independents and ten Republicans to side with 48 Democrats. But they will be sure to do what they can to get this over the line as the United States Census Bureau is due to release population data which is usually used to redraw congressional districts.

Up Next (Times in GMT)

You can view all the scheduled events for today using our economic calendar, and keep up to date with the latest market news and analysis here.

  • There’s no major economic reports scheduled for today, although Eurozone retail sales, US initial jobless claims and factory orders warrant a look.
  • Fed Chair Jerome Powell is to talk on the US economy before the Wall Street Journal’s job summit. In particular, traders will want to hear any comments surrounding recent turbulence on the bond markets.

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