Donald Trump Junior’s Russian email saga provided a bit of volatility to the overnight session and Sneaky Sound System was the inspiration for today’s title. Trump’s eldest son released an email chain in which he said he would welcome (“love it”) the possibility of Russia helping his father’s campaign via compromising information about Hillary Clinton. The S&P500 index sold off on the news, falling more than 0.5%, but it recovered almost all of its loses in the second half of the overnight session. The email news triggered a rally in US treasuries and the dollar was weaker against most currencies. In other news, Fed Governor Brainard reiterated her views for a cautious approach on future rate hikes and noted that she would “soon” be ready to support the Fed’s plan to reduce its balance sheet. How soon remains one of the key questions for markets.

After the initial risk off move, courtesy of Trump Junior’s email trail, US equities ended the day little changed with technology shares the highlight helping the NASDAQ closed the day +0.29%. On the other side of the Atlantic, Europe was unable to follow the positive lead from Asia with all major European equity indices down between -0.20% and 0.78% on the day.

On first impressions reaction to Trump Junior’s email appears to have had a more lasting effect on US Treasury yields and the USD. Prior to the email chain release, 10y UST yields were trading at 2.39% with the intraday chart showing a steady decline towards 2.36% over the course of the night. Flows, a strong 3 year auction and Brainard’s cautious take on future rate hikes also contributed to the move lower in yields.

The intraday chart for the USD index (DXY) also shows a steady decline throughout the overnight session (-0.55%), largely reflecting the outperformance of US rates relative to Europe (10y Bunds ended the day 1bps higher at 0.546%) and also a recovery in commodity link currencies aided by gains in oil (+2%/3%), iron ore (+2.2%) and copper 0.9%.

Looking at the G10 leader board, EUR is leading the pack, up 0.58% on the day and currently trading at 1.1465. A weekly close above 1.1450 would open the door for another leg higher for the cross. We expect EUR to trade up towards 1.17 in Q3, thus breaking the rough 1.05-1.15 two and a half-year range amid a structural re-rating.

After trading to an overnight low of 0.7605, the AUD has staged a decent recovery reaching an overnight high of 0.7643 and settling around 0.7640 currently. As noted above, in addition to a softer USD, commodities have had a decent night with iron ore up for a third consecutive day ( $65.40 ).

After coming under pressure yesterday, NZD has also managed to reverse some of its losses thanks to a softer dollar and uplift in commodities. The kiwi traded lower yesterday amid softer card transactions data for June, followed by a soft reading for the ANZ monthly inflation gauge. This monthly data releases don’t often elicit a reaction by the currency, but with speculative positions at a 4 year high, the softer data provided good cover to reduce those positions. NZD now trades at 0.7225.

Lastly as we are about to press the send button, Politico reports that Cohn is said to be top candidate to replace Fed Chair Yellen. Cohn would be the first Fed chair in four decades who isn’t an economist.  Cohn does not have a track record on monetary policy. But he is viewed as closer to Yellen’s preference for gradual rate hikes.

Coming Up

This morning Australia gets its Monthly Consumer Confidence reading and it will be interesting to see if the divergence between business and consumer confidence, which has been in place since 2014, shows any signs of narrowing (see chart of the day below).

UK labour market statistics are today’s data highlight in Europe.  The market is looking for the unemployment rate to remain unchanged at 4.6%, but perhaps more importantly the average weekly earnings reading is expected to decline to 1.8% 3M/YoY from 2.1% previously. CPI in the UK is running at 2.9% yoy so today’s data releases are likely to confirm UK wages declined both in real and nominal terms in May. If so, the data will also provide some ammunition to the hawks within the BoE.

Also out today, the Eurozone releases its industrial production figures for May and following positive releases from France, Germany and Spain, the market is looking for a solid 1% monthly print, up from 0.5% in April.

Tonight Bank of Canada is likely to be the first major central bank to follow the Fed in lifting its policy rate (midnight Sydney time). A month ago the OIS market was pricing a 90% chance for a 25bps hike in March 2018, since then however signalling from deputy Governor Wilkins and Governor Poloz alongside better than expected data releases have cemented expectations for the BoC to normalise its policy rate. Now the market is not only fully priced for a hike this week (93%), another hike in December is also essentially fully priced. USD/CAD is four big figures lower in the past month, so a lot is already in the price suggesting there is a risk the BoC does a dovish hike and USD/CAD moves higher.

Moving on to the US, the Fed will publish Chair Yellen’s testimony to Congress (22:30 Sydney time) and then she testifies before the House Financial Services Committee at midnight. We expect the key message to remain unchanged, Fed to hike again later in H2-17 and B/S shrinkage to begin sometime over the coming months. The Beige book is released early tomorrow morning and the market will be looking for any anecdotal evidence of upward pressure on wages particularly in regions with low unemployment levels. Also tomorrow morning Fed George speaks in Denver on the economic outlook and the Fed’s balance sheet.

Overnight

On global stock markets, the S&P 500 was -0.08%. Bond markets saw US 10-years -1.25bp to 2.36%. In commodities, Brent crude oil +2.62% to $48.11, gold+0.3% to $1,217, iron ore +2.1% to $65.40, steam coal +1.2% to $83.35, met. coal -0.9% to $166.50. AUD is at 0.7637 and the range since yesterday 5pm Sydney time is 0.7603 to 0.7643.

For full analysis, download report

• Markets Today: 12 July 2107 (PDF,  2MB)

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets

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