Hawkish Fed the name of the game going into Europe today

Stocks are staying on the retreat and after the selloff yesterday, risk aversion is taking hold. Commodity currencies are the laggard today and we’re even seeing oil fall by a little over 1% to below $77 again.

US futures are pointing lower with S&P 500 futures down 0.5% and Nasdaq futures down 0.8%. All this as Treasury yields soar, with 10-year yields breaking higher to 1.72%:

The moves come after a more hawkish Fed tone from the FOMC meeting minutes. In case you missed the headlines from yesterday:

In my view, the bond market chart above remains a key one to watch ahead of the US non-farm payrolls tomorrow. There is some resistance for 10-year yields around 1.75% to 1.79% so that will be worth keeping tabs on.

But amid the recent surge higher and focus on rate hikes and balance sheet runoff, equities are finally losing steam and perhaps retracing. I’d argue that is likely to offer a dip buying opportunity but perhaps not towards the end of the week.

As for USD/JPY, the latest risk retreat is helping the yen in trading today. The pair is back under 116.00 despite higher Treasury yields. But the latter is likely to dominate the longer-term backdrop and if anything else, the pair is also a buy on dips in my view.

Barring any turn for the worse in the pandemic and any major risk aversion event, the path of least resistance is for USD/JPY to move much higher this year in my view.

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