Rising yields keep stock markets subdued

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It was another cautious day for European markets yesterday, with little in the way of overall direction, after China exports for May plunged by -7.5%, raising concerns about the outlook for global demand, while the Bank of Canada followed the RBA in hiking interest rates by 25bps. 

With the prospect of more interest rate rises on the way, yields pushed higher, which in turn acted as a drag on equity markets more broadly, even as US markets finished the session mixed, while Asia markets have slipped back. The Russell 2000 finished the day strongly higher, helped by the recovery in regional bank stocks, while the Nasdaq 100 fell sharply, and the S&P 500 also closed lower.

With the Federal Reserve, ECB, and Bank of Japan meetings due next week, and this week’s hikes pointing to further interest rate pain, bets about a Fed pause next week are being taken off the table, over concern the US central bank may well follow suit. When the Fed met back in May, the removal of the language that signalled that more hikes were coming led to the impression that we’d probably see a pause in June, a view that was given some encouragement a few days ago by Fed governor Philip Jefferson in a recent speech, just before the central bank went into the blackout period. This still seems to be the favoured outcome; however, this week’s rate hikes have muddied the waters somewhat. 

Today we have weekly jobless claims, which are only likely to reinforce the hawkish narrative. With ECB officials also adopting a hawkish tone, we can still expect another 25bps hike from the ECB next week, even if the Fed does stay on hold. As for today’s European session, we look set for a lower open, with the only data of note being the final revision of EU Q1 GDP, which is expected to see a downward revision to 0% from 0.1% after the downgrade to Germany Q1 GDP at the end of last month.

EUR/USD – still trading between resistance at the 1.0780 highs of last week, and support back at the recent lows at 1.0635. We need to see a break of this range with broader resistance at the 1.0820/30 level.

GBP/USD – chopping around below resistance at the 1.2540 area and last week’s highs and support at the 1.2300 level. We have trend line resistance from the 2021 highs at 1.2630. This, along with the May highs at 1.2680 is a key barrier for a move towards the 1.3000 area. 

EUR/GBP – support remains at the 0.8560 level and last week’s lows, just above the December 2022 lows at 0.8558. While below resistance at the 0.8660 area the bias remains for a drift lower. We also have major resistance at the 0.8720 area.

USD/JPY – currently undergoing some chop between 139.00 and the recent highs below 140.95. Is the US dollar trying to carve out a top? The main resistance remains at 140.95 area. We have support at the 138.40 area which if broken could see a move back to the 137.00 area.  

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