Equity markets
had another good day on Tuesday, with the S&P500 up 1% and Euro stoxx up 0.7% on the day. The positive sentiment has carried over to Asian trading overnight, driven by Japan’s Nikkei index, which set a new high since January 2008 after the yen broke a four and a half year low against the dollar, boosting the earnings outlook for exporters.
U.S. 10-year treasury yields continued the surge towards 2% - a level last seen in March this year. The recent move higher in U.S. yields is moving in lock-step with the weakening in USD/JPY and the surge in Japanese government bond yields. The 10-year JGB has risen 30bp over the past three days, and inflation expectations have surged – a sign that Bank of Japan’s bold policy move is working.
It is worth noting that the Congressional Budget Office (CBO) released its update of the projected U.S. government budget deficit yesterday. The CBO now projects that the deficit will shrink to 4% of GDP this fiscal year, and further to 3.4% in FY 2014 and just 2.1% in FY2015. The pressure on U.S. politicians for more fiscal tightening than what is in current legislation is thus small. It also delays the need to raise the ceiling on the federal debt: CBO now says the Treasury’s manoeuvres will give it enough cash to pay the bills through October or November.
In the FX markets EUR/USD traded close to a five week low as better US economic data and renewed focus on Fed’s exit from QE support USD. As mentioned above, JPY reached a new high in this cycle, breaking 102 against USD.
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