World markets continue to adjust to an outlook for higher US interest rates and increased inflation risk boosted by major US tax cuts. The seemingly relentless sell-off in bond markets over recent weeks reflects the extent of the increase in yields appropriate for a scenario where the Fed is normalising policy and the Government is adding a large dose of short term stimulus via tax cuts.

The major feature of world markets last night was the significant rally in the US Dollar as it broke clear of resistance and continued to adjust to the outlook for higher US interest rates.  While AUDUSD has dropped sharply over the past two days, this has been mainly about $US strength with relatively modest moves against the currencies of many of our other trading partners.

Stock markets are continuing to do relatively well in the face of rising interest rates. While this partly reflects an improved earnings outlook, it’s also about funds flowing out of bond markets needing a home. Stock markets appear to be one of the main beneficiaries of the bond sell-off.  This was reflected in a steady open for the ASX 200 this morning.

Gold was a casualty of the US Dollar rally last night and gold miners are likely to be under pressure again today. Oil, on the other hand is holding up relatively well.  Next year’s production cuts are likely to see the market supported with bargain hunters active in quality energy stocks on minor dips.