With no key distractions ahead of Yellen’s testimony tomorrow, markets are taking the path of least resistance. For equities, this still appears to be lower, with European equities down yesterday for the sixth consecutive session (looking at the Eurostoxx 50 index), with this being biggest down-move since the first trading day of 2016. The outlook for the global economy remains too uncertain, with the growth dynamics in the US also moderating, whilst the QE being undertaken by the ECB not seen as anything like sufficient to act as a counter-weight to these external forces. As we mentioned yesterday, for FX this has resulted in a change of direction. It’s not about the dollar and the impending rate increases from the Fed this year. After some wobbling, yesterday turned out to be about risk and more pointedly, risk aversion. This could be seen in the further strength seen in the yen, together with weakness in sterling. Having initially joined in the weakening against the dollar, the euro found some buyers in the European afternoon session, putting further weight onto the view that it’s more of a safe haven than funding currency in the current environment.
Fort today, we are seeing a steady to slightly firmer tone to equities at the start of the session, but the turn-around is currently tentative at best. The Japanese 10Y government bond is now displaying a negative yield for the first time ever, whilst the yen has seen a volatile session. USDJPY was initially lower, although some of this strength has been erased for the start of the European session. The data calendar is relatively light, with just UK trade data at 09:30 GMT, leaving markets at the back and call of wider sentiment and clinging onto the weak hope that Yellen may somehow offer some support at her testimony tomorrow.