Wednesday 09:30 GMT
The dollar and government bond yields are jumping, and gold is falling, as hawkish comments from Federal Reserve officials cause traders to drastically shorten the odds of an increase in US interest rates this month.
Meanwhile, US equity index futures point to another record on Wall Street, tracking gains in Europe and Asia, after Donald Trump addressed Congress for the first time, with the US president emphasising plans for significant tax reform while striking a slightly more optimistic note than in recent speeches.
The US dollar and Treasuries are in focus after William Dudley, head of the New York Federal Reserve, said in an interview with CNN that the prospects for adding to December’s rate rise had become “a lot more compelling”.
This follows Robert Kaplan, president of the Dallas Fed, saying on Monday that the US central bank may need to raise interest rates “sooner rather than later”.
Together they have added to the chorus of Fed members floating the idea of tighter monetary policy, a trend deemed all the more likely given the potential boost to growth provided by Mr Trump’s mooted fiscal strategy. Fed chair Janet Yellen is due to give a speech on Friday, too.
Futures markets are now pricing the chance of a 25-basis-point rate rise in March at 80 per cent compared with 36 per cent a week ago. The policy-sensitive US 2-year bond yield, which moves in the opposite direction to the price, is up seven basis points to 1.28 per cent.
The 10-year Treasury yield is up 6bp to 2.42 per cent and this is contributing to equivalent maturity German Bunds adding 4bp to 0.24 per cent, the latter also pressured by news that eurozone manufacturing activity is at its best level in six years.
This US/German yield differential — with German 2-years offering minus 90bp, the 2-year spread is currently 218bp — reflects the policy divergence between the Fed and European Central Bank, which remains in easing mode.
And this is underpinning the buck. The dollar index, which measures the greenback against a basket of its peers, is up 0.5 per cent to 101.66, trundling back towards the 14-year intraday high of 103.82 hit at the start of the year.
The dollar’s broad advance sees it gain 0.3 per cent versus the euro to $1.0541 and add 0.1 per cent against sterling to $1.2380.
The yen is 0.7 per cent weaker to ¥113.54 per buck as the Japanese currency also loses some of its haven cachet amid the broader market’s positive tone.
The Australian dollar enjoyed an initial surge against the greenback after data showed that gross domestic product rebounded in the December quarter, helping the country avoid what could have been its first recession in 25 years.
However, the recovery of the buck meant its Aussie counterpart pared gains of as much as 0.5 per cent to be down 0.1 per cent at $0.7649 in European trading.
US equity futures initially pared their early session gains that came shortly after Mr Trump began his address as some analysts expressed disappointment that the president provided little fresh detail on his administration’s economic policies.
“Although Trump received rapturous applause from a very proud Republican Congress, the market reaction was muted, as fiscal details were fairly thin on the ground,” said Kathleen Brooks, research director at City Index.
However, a more fulsomely bullish interpretation of the “Trump trade” took hold as the European day got into gear, and S&P 500 futures now indicate the Wall Street benchmark will gain 10 points to 2,374, a new record.
The pan-European Stoxx 600 is up 0.6 per cent as miners lead the way and insurance groups welcome the higher bond yields. The UK’s FTSE 100 is up 0.7 per cent to 7,317, just 21 points below its best ever close.
The weaker yen helped push Japan’s Topix up 1.2 per cent, Hong Kong’s Hang Seng gained 0.2 per cent, and the Shanghai Composite also added 0.2 per cent after two separate surveys showed that China’s manufacturing sector continued to improve in February.
Oil prices are breaking a three day losing streak as hopes for improving global demand counteract the stronger dollar.
Brent crude, the international benchmark, is up 0.1 per cent to $56.54 while West Texas Intermediate is adding 0.2 per cent to $54.12.
Gold tends not to like a firmer buck and rising bond yields, and so the bullion is down 0.3 per cent to $1,245 an ounce.
Additional reporting by Peter Wells in Hong Kong
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