Dollar, Oil Jump; Gold, Yen Fall; Yields Break 3% (Again)

May 9, 2018

Frankfurt (May 9)  The STOXX Europe 600 inched higher this morning, countering the pessimism that weighed on investors during the Asian session. US futures on the S&P 500, the Dow and the NASDAQ 100 suggest the underlying indices might open stronger as well, suggesting that US President Donald Trump's decision to withdraw from the Iran deal was already priced into US equities.

Crude oil returned to the upside of $70 a barrel after Trump announced he will not sign the waiver for sanctions against Iran. The dollar extended its advance to a fourth straight day, hitting its highest level since December, as 10-year Treasury yields climbed back toward the 3 percent psychological level.

Asian indices were mixed, with stocks listed on Japan's TOPIX trimming losses from 0.65 percent to 0.4 percent. Chinese equities listed on the Shanghai Composite slid and shares on Hong Kong's Hang Seng settled at +0.4 percent, after they fluctuated between a 0.17 percent loss and a 0.65 percent gain.

Down under, the S&P/ASX 200 gained 0.25 percent after the Australian government announced new tax cuts that are expected to translate into AUD $530 ($393) yearly savings for 10 million of Australians.

Global Financial Affairs

The price of WTI crude ended higher after swinging wildly between gains and losses. Traders are considering the ramifications of renewed Iran sanctions, for energy prices. Our expectation earlier this week that oil was bound to climb further was confirmed by its fresh 5 percent leap from yesterday's $67.64 low. Technically, this unique event caused the WTI price to dip deeply into the Falling Flag—as part of a return-move to the Ascending Triangle. However, it then found demand and closed well above the flag top.

The dollar advanced for a fourth straight session, in line with our forecast last week on the likely effects a US withdrawal from the Iran deal would have on different asset classes. The greenback was able to advance even as other safe haven assets such as gold and the yen retreated.

Even more noteworthy, the dollar ascent didn't stop investors from bidding up oil, which in turn underscores the extent of market worries over supply glitches. Technically, the dollar is extending the upside breakout of its downtrend line since the beginning of January 2017. The 200 DMA, aligned with the downtrend line, attests to its significance.

It seems that the fresh breach of the key 3 percent mark by 10-year yields—and the heightened expectations it underscores for a faster winding down of the Fed's accommodative monetary policy stance, which had allowed equity markets to enjoy their second longest bull run on record—is now overshadowing the bigger and more tangible headwinds stemming from the Middle East, the most combustible region on the planet. This seems to confirm the tendency, among investors, to pay more attention to direct short-term profits versus geopolitical risk, an offshoot of market attitude since the dreaded ramifications of the 2016 Brexit vote didn't materialize.

With a $25 billion auction of 10-year US notes scheduled for today, investors will soon find out whether new Treasury bonds will carry a 3 percent coupon—for the first time in almost seven years.

We were wrong in our prediction that gold would jump on a US withdrawal from the Iran deal. Dollar strength, alongside yields moving back above the 3 percent key level, are overshadowing geopolitical risk. As a result gold has been pushed gold 0.75 percent lower. Technically, gold is set to complete a top, should the price close below $1,300.

Emerging markets equities and currencies, alongside most metals, were weighed down by the USD. The Indonesian rupiah extended its decline to a 29-month low on worries concerning capital outflows from emerging markets in favor of higher US yields.

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