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After hitting a fresh record on Wednesday, the Dow closed off its high but stayed in the green for a fifth straight session. Financials led the way as Treasury yields soared and interest rate expectations jumped higher.
The market is now pricing in an 80% probability of a rate rise in December. Additionally, the markets are reassessing how far the Fed’s tightening cycle will go and expectations are for rate rises to continue for longer.
Dollar tracks yields
The reason? Simple economics, the stunningly strong US economy is growing at a faster rate than its peers, driving Treasury yields to their highest since 2011. As economic data from around the world misses expectations, US economic stats are consistently surprising to the upside. US non-manufacturing data proved to be a prime example, with activity in the sector expanding at the fastest pace in 20 years, whilst service sector PMI’s from the UK and Europe were lacklustre at best.
Soaring economic optimism meant that Wednesday was a great day to be long the dollar. The greenback was swept to a six-week high versus a basket of currencies, reaching an 11-month high versus the yen. After its tremendous rally in the previous session, the dollar continues to move higher in early trade on Thursday. We expect that this rally still has further to go as US non-farm payrolls move into focus.
The strong non-manufacturing data was well above average and is consistent with healthy levels of growth. This means that labour demands will remain robust. In short, the US economy is strong, and we expect US non-farm payrolls on Friday to reflect that. Strong payrolls generally make a strong dollar.
Asian markets lose appeal
Good US economic data and dollar strength saw money being drawn out of emerging markets. Emerging market currencies and Asian markets traded lower across the board overnight. Asian markets are quickly losing their appeal as emerging market fears combined with trade tensions and better opportunities stateside mean investors are pulling their funds from the region. The MSCI’s Asia Pacific ex-Japan Index dived 1.1%.
European bourses are lining up for a mixed start after the bell. The FTSE is looking to be one of the weaker openers.
Oil prices easeOil prices have eased slightly in early trade this morning. A surge in US crude inventories saw oil pulling away from fresh 4-year highs from the previous session. A private deal by Saudi Arabia to increase production through to December should see an easing in lofty oil prices.