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Pessimistic investor sentiment caused US equities to struggle yesterday, with sellers dominating market action into the conclusion of the North American trading session.   Equities and fixed income continued to move in tandem, with rising 10-year US treasury yields making traders skittish about the prospects for the recovery in the US should rates continue to levitate ahead of the Fed potentially reducing the amount of assets its purchases every month.   The yield on the benchmark 10-year US treasury hit a high just shy of 2.9% yesterday, with the S&P sinking by 0.6% as the VIX was banged higher to 15.10.

Many market participants will be closely watching the behaviour of 10-year rates in the near future, as the knock-on effect of elevated long-term interest rates could prove to be detrimental to the healthy flow of credit and consumer based demand in the American economy.   Although rates have spiked during 2013, the long-term downward trend channel that has been in place since the late 80’s is still in place, with a break into the mid-3% range being needed to call into question the long-term bull market for fixed income.

The overnight session was dominated by the release of the minutes from the last Reserve Bank of Australia monetary policy meeting, where the bank decreased the overnight lending rate by a further 0.25%, putting the benchmark cash rate at 2.5%.   While the RBA noted that the recent weakness in the Aussie had allowed the bank to be less aggressive in monetary policy easing, the central bank also kept the door open for further reductions in the overnight lending rate, should the incoming data telegraph additional policy tweaks are needed in order to achieve sustainable growth within their inflation target.   The Aussie weakened against the big dollar as traders digested the minutes, with the AUDCAD pair easing below the 0.9100 handle on the slightly dovish tone from the Australian central bank.

With investors keeping a sharp eye on bond yields in developed markets, the rout in emerging markets continued overnight.   India’s regional fell another 0.34%, while the Rupee gapped to a 64 handle against the USD before retracing some of those losses and moving back into the low 63s.   So far the government’s effort to slow the pace of capital outflows and stabilize the currency have been ineffective, with net outflows of INR debt reaching close to $11bn since early June as higher yields and the prospect of Fed tapering intensify the situation.   Not immune from the selling frenzy in Asia, the Nikkei slumped 2.63% while the USDJPY strengthened into the low 97s after the tax panel for the ruling party in Japan reaffirmed that a sales tax rise is inevitable.

The sell-off in Asia has permeated west, with major European bourses well in the red as we enter the North American cross.   Producer prices for the month of July in Germany came in a little below expectations with a 0.1% decrease, although the soft producer prices have done little to persuade market sentiment this morning.   Despite major equity indices taking on water across the Atlantic, the EUR has been well bid throughout the European session, trying to establish itself above the 1.3400 level against the USD before the opening bell in North America.

As we head into the North American open, the most prominent data point was the release of wholesale sales for the month of June in Canada.   Expectations were for the reading to give back a portion of last month’s 2.3% gain, and to see demand for wholesale goods slip by 0.5% over the month of June.   The print ended up giving back all of last month’s gain plus some, dropping by 2.8% over June with May’s reading being revised lower to only a 2.2% gain.   The miss of expectations has accelerated the weakness in the Loonie seen overnight, and a break of the consolidative (albeit short-term) symmetrical triangle pattern has beefed up the bid in USDCAD, with the pair trying for a test of the 1.0400 handle.   Protective stops for short USD exposure have been noted around the 1.0400 level, which could accelerate the run higher and have the pair aiming for the July high at 1.0449.

US equity futures are showing some life before the bell, looking to reverse course on the four straight sessions of negative prints and buck the negative sentiment that has engulfed global markets.   The gains are modest, but the tape is looking somewhat positive heading into the opening bell.   The DXY is slightly weaker moving south of the 81 handle, while some easing pressure on the rate front has the US 10-year yield at 2.83%.

Looking ahead to the economic docket for  tomorrow, although Existing Home Sales for the month of July are set to be released, the minutes from the last FOMC meeting will garner the majority of the market’s attention.   Although the statement from the last meeting reiterated the Fed would continue to assess the incoming data before making a decision on whether to dial back its bond purchases, the surrounding discussion in regards to the size and efficacy of the monthly purchases could give further clues as to how the Fed is leaning ahead of the September meeting.   Expect any prolonged discussion surrounding the current state of the economy and the decreasing economies of scale of further asset purchases the current rate to weigh on high-yielding currencies and fixed income, as traders look to increase exposure to the USD in expectation of a September taper announcement.   While the minutes will most likely impact markets  on Wednesday, one must be careful to note that this meeting was held before the last Non-Farm Payroll number, and the employment report for August will still be a major factor into the Fed’s decision making process, with the potential for back-to-back soft jobs numbers keeping the Fed on hold.

Further reading:

EUR/USD Breaks to 6 month high

RBA pours cold water over Aussie