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US dollar strength, bond weakness, tilts markets

Asia Pacific share markets are set for gains today, bouncing back from recent losses underpinned by a strengthening dollar. Bond market pressure is weighing on investor sentiment. Crucial trade talks between China and the US could determine the direction of market moves in the near term.

US ten year bonds are now above 3%, with a looming inflection point at 3.1%. A break higher could bring a sharp bond market sell off and flavour the debate about the right levels for interest rates as growth continues to improve. Charts show the macro driver is echoing across asset classes, with the 3% drop in the S&P 500 over the last week tracking the gains for the US dollar.

The exception is commodities. While safe haven precious metals are selling down in response to the currency moves (along with the Japanese Yen) industrial commodities are holding up. Crude oil is trading near three year highs.

The pressure on stocks comes despite strong reporting from US corporates. Overall earnings for the 180 S&P 500 companies that have filed so far show average growth in earnings at a massive 25% (Bloomberg). In a reflection of deteriorating sentiment this has led to concerns over “peak earnings”, and pressure on highly valued tech stocks.

Statements from the White House that a quick deal on trade with China saw markets recover some losses. While both superpowers are determined to show resolve on the issue mutual benefit may triumph. Any failure on the issue could see markets quickly turn febrile.

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