The good news for investors is that Friday’s sell-off in tech stocks saw little follow-through selling yesterday. And overnight, some of those stocks which led the sell-off, such as the Korean chipmakers, have bounced back strongly. It does seem the creation of leveraged ETFs on these Korean chipmakers has added to volatility, including these leveraged products falling even when the underlying stocks they are tracking are rising.
The volatility of tech stocks, however, looks to be a distraction to the dominant cyclical story in FX markets, which is the potential for the Fed to tighten policy. Last week was all about the strength of the US labour market and this week the market will be focused on US price data. This starts with tomorrow’s May CPI and is followed by PPI on Thursday. The market looks positioned for some firm data here and a far less dovish FOMC meeting in a week’s time.
Today’s focus is on the NFIB small business optimism data, the weekly ADP jobs data and the April trade balance. On the subject of trade, China released another healthy set of trade data overnight, which is lending some support to the renminbi and the Asian currency complex in general. On a related subject, the US Treasury market should take note of likely FX intervention across a large swathe of Asia and what it means for US Treasury sales. Fed custody holdings data show another $71bn decline in foreign official holdings of Treasuries since the start of May – which will add further pressure to the market.
DXY is consolidating after a strong rally on Friday, and we would expect it to find support around the 99.80 area before another look at the upside later this week.
Chris Turner
