Janet Yellen did her return testimony overnight, this time to the Senate.  What has caught the market’s attention is the inevitable interest from Congress in her views on, and conceivable policy responses to, current financial market turmoil.  She was asked about the possibility of negative rates for the Fed, saying that the in light of European other central bank actions, the Fed was taking a close look at negative rates in the event that it might be considered.  The Fed is doing a lot more work on whether it would work and be right for the Fed in the event was “needed”.  She also said the Fed was surprised by the (size of) fall in oil and the extent of the strength in the US dollar since 2014 was not “something we anticipated”.

There was nothing there deflecting the market from the view that the Fed is on hold for longer and that’s how the market traded in what was last night deeper “risk-off” sentiment . The short end of the US Fed funds futures curve rallied further by up to 10bps and more with only a 50% chance of occurring priced in by the end of 2017. US 2yTreasury yields eased another 4bps.

Oil did came in for more concerted selling overnight with West Texas down another $1, but is rallying into the last hour, trading at $27.  The Swedish Riksbank eased policy more than expected, cutting its rate 15 bps to -0.50%, the market is expecting a 10 point cut. The kroner did briefly weaken (presumably as the central bank had hoped) but then stabilised (even against the EUR) given the big rally going on in top tier bond markets.

Equities came in for more selling, the  Eurostoxx 600 index down 3.68%, banks taking more heat, down in Europe by an eye glazing 6.26% with SocGen and Credit Suisse both reporting.  It’s been a similar if less savage story on Wall Street with the Dow down 1.8% into the last hour of trade and S&P 500 down 1.4% with the KBW banks index down 4.2%.

In FX markets, it’s been another evolution with the US dollar running into some interest rate headwinds as their rate markets rally and lose some of its (expected) yield gloss, the Euro trading above 1.13 and the yen in the low 112s.  The one asset class that has performed strongly overnight has been precious metals; gold up 4.3%, silver 3.1% and platinum 2.6%. The AUD has overall held its ground trading this morning close to 0.71, with the Chinese iron ore market coming back to life yesterday, prices edging lower by 1.05% to $45.25/t for the 62% fines benchmark.

Coming Up

Last week we had the first RBA board meeting for this year quarterly statement on monetary policy and this morning commencing around 930 have Stevens and his team given their six monthly testimony before the House of Representatives’ Standing Committee on Economics. This will be watched not for any new fundamental directions on the economy or the policy outlook but nuances surrounding risks and the subtext views on various aspects of the economy, the Aussie dollar and markets.

We also have at the 1130 ABS release time window housing finance approvals for December out this morning, the market looking for a 3% rise; NAB’s estimate is a little thinner +1.2% for the headline number of owner-occupied approvals. Markets expect that the underlying tone will still point to trend weakness in investment lending finance demand, though we note that this week’s HIA new home sales report for December revealed a stark rise in apartment sales and today’s data will also be assessed in that light.

Tonight in the US, there will be intense focus on the US consumer with the release of January retail sales and preliminary consumer sentiment for February. We also have New York Fed President Bill Dudley giving a briefing on household borrowing and indebtedness along with the first estimate of consumer sentiment for February from the UoM survey, the market expecting steady confidence. The fed will also be paying close attention to this survey’s measure of longer term (5-10 years) consumer inflationary expectations that, for the past three months, as counterintuitively been rising despite collapsing oil prices. Is this a sign of some greater labour market/ wage confidence? For CAD watchers, there is second leg of house price data, this one the Teranet/National Bank house price index for January.

There will also be pretty intense focus on key data out of Europe including Q4 private preliminary GDP figures for Germany, Italy, and the Eurozone, growth in the zone to be steady at 0.3% for the quarter for an almost in changed annual rate of 1.5% after 1.6% in Q3.

Overnight

On global stock markets, the S&P 500 was -1.40%. Bond markets saw US 10-years -4.31bp to 1.63%. On commodity markets, Brent crude oil -0.88% to $30.57, gold+4.5% to $1,248, iron ore -1.1% to $45.25. AUD is at 0.7094 and the range was 0.6984 to 0.7153.

Good luck.

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• Markets Today: 12 February 2016 (PDF, 1MB)

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