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Markets Commentary

After yesterday’s Fed minutes that came in shocking hawkish, the selling has continued overnight, led by the commodity complex as rate hike fears have pushed oil back down some 2% from yesterday’s 7 month highs, which in turn has dragged global stocks lower to a six-week low, while pushing bond yields higher across developed nations as the market suddenly reprices the probability of a June/July rate hike.

For now the critical S&P500 support level at 2030 continues to hold, however that may be put in test today, leading to the next leg lower in the S&P. Should stocks open here, the S&P will be red for the year.

The dollar continued to rise overnight after its biggest jump in 6 months, which led to a substantial devaluation of the Chinese Yuan as a result, which in turn may have spooked the global markets who still remember that China was the primary catalyst that unleashed the wave of selling in December and January.

  • The hawish Fed minutes pressed the MSCI All Country World Index which declined for a third day, and dropped to the lowest level since April 8.
  • U.K. gilts and German bunds fell, after Treasuries posted their biggest losses of the year.
  • Currencies in Australia, China and South Korea sank to two-month lows against the dollar,
  • while crude oil retreated and copper fell toward levels last seen in February.
  • Gold and silver slipped to this month’s lows.

Many were shocked by the Fed’s minutes which come from a meeting where Yellen was said to be fully dovish. “There is this enormous policy uncertainty,” said Randal Jenneke, Sydney-based fund manager at T. Rowe Price. “The Fed has changed the goal posts so many times, everyone is confused. No one knows when they’re going to raise rates and no one knows what’s going to be the key thing to trigger the decision.

Many were shocked by the Fed’s minutes which come from a meeting where Yellen was said to be fully dovish. “There is this enormous policy uncertainty,” said Randal Jenneke, Sydney-based fund manager at T. Rowe Price. “The Fed has changed the goal posts so many times, everyone is confused. No one knows when they’re going to raise rates and no one knows what’s going to be the key thing to trigger the decision.

As a reminder Dudley last said about two weeks ago that two rate hikes this year was a ‘reasonable’ expectation.

According to Bloomberg calculations, Fed Funds futures show the odds of a move surged to 32 percent on Wednesday, after tripling to 12% from 4% in the prior session as data on inflation, housing starts and industrial production beat forecasts.

“The markets were getting a little too complacent for the scope for rate hikes this year and next year but the fed minutes were on the hawkish side yesterday so that made investors nervous,” said Allan von Mehren, chief analyst at Danske Bank told Bloomberg. “We see some repricing on bond yields and it’s also having a negative spill-over on equity markets.”

In other, otherwise very bullish news, Moody’s lowers US growth outlook to 2.0% from 2.3% and cuts G20 EM growth to 4.2% vs. Prey. 4.4%, sees China growth slowing gradually to around 6.3% this year. However this time not even a major growth forecast cut was enough to send stocks soaring.

The Stoxx Europe 600 Index dropped 0.8 percent, with BHP Billiton Ltd. and Rio Tinto Group leading miners lower as commodities retreated. The European equity gauge has gone a month without posting a daily gain of at least 1 percent, and is down 4.5 percent from its April 20 peak.

Oil fell below $48 a barrel on Thursday, pressured by a stronger dollar and as a surprise increase in U.S. crude inventories served as a reminder that supply remains ample despite output problems. As Reuters recaps, supply losses in Canada and Nigeria have lent support, but cooler weather was expected to help firefighters battling Canadian wildfires. Traders said Exxon Mobil is boosting output at Nigeria’s largest crude stream.

“The main factor weighing on prices is the much appreciated U.S. dollar,” said Carsten Fritsch, analyst at Commerzbank. “What is more, rain forecast in the Canadian oil province of Alberta is giving rise to hopes that the devastating wildfires there could be brought under control.”

Market Wrap

  • S&P 500 futures down 0.3% to 2035
  • Stoxx 600 down 0.8% to 335
  • FTSE 100 down 1.5% to 6075
  • DAX down 1.5% to 9797
  • S&P GSCI Index down 1.6% to 364
  • MSCI Asia Pacific down 0.9% to 125
  • Nikkei 225 up less than 0.1% to 16647
  • Hang Seng down 0.7% to 19694
  • Shanghai Composite down less than 0.1% to 2807
  • S&P/ASX 200 down 0.6% to 5323
  • US 10-yr yield up 1bp to 1.86%
  • German 10Yr yield up 2bps to 0.19%
  • Italian 10Yr yield up less than 1bp to 1.5%
  • Spanish 10Yr yield up 1bp to 1.61%
  • Dollar Index up 0.1% to 95.17
  • WTI Crude futures down 2% to $47.22
  • Brent Futures down 2.3% to $47.82
  • Gold spot down 0.3% to $1,254
  • Silver spot down 1.5% to $16.65

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