After yesterday’s algo-driven mad dash to close the S&P green both for the day and for the year following Fed minutes that came in shocking hawkish, the selling has continued overnight, led by the commodity complex as rate hike fears have pushed oil back down some 2% from yesterday’s 7 month highs, which in turn has dragged global stocks lower to a six-week low, while pushing bond yields higher across developed nations as the market suddenly reprices the probability of a June/July rate hike.

For now the critical S&P500 support level at 2030 continues to hold, however that may be put in test today, leading to the next leg lower in the S&P. Should stocks open here, the S&P will be red for the year.

The dollar continued to rise overnight after its biggest jump in 6 months, which led to a substantial devaluation of the Chinese Yuen as a result, which in turn may have spooked the global markets who still remember that China was the primary catalyst that unleashed the wave of selling in December and January.

The hawkish Fed minutes pressed the MSCI All Country World Index which declined for a third day, and dropped to the lowest level since April 8. U.K. gilts and German bunds fell, after Treasuries posted their biggest losses of the year. Currencies in Australia, China and South Korea sank to two-month lows against the dollar, while crude oil retreated and copper fell toward levels last seen in February. Gold and silver slipped to this month’s lows.

Many were shocked by the Fed’s minutes which come from a meeting where Yellen was said to be fully dovish. “There is this enormous policy uncertainty,” said Randal Jenneke, Sydney-based fund manager at T. Rowe Price. “The Fed has changed the goal posts so many times, everyone is confused. No one knows when they’re going to raise rates and no one knows what’s going to be the key thing to trigger the decision.”

This is what the Fed calls successful communication. There will be more of it today.

Comments from Fed Vice-Chair Fischer and President Yellen will likely be crucial in terms of really hammering home expectations and we’ll hear from the former this afternoon. Fischer’s event is closed to media so it remains to be seen how much he’ll delve into policy outlook but we will also hear from Dudley this afternoon who’s views are closely aligned to those of Yellen so that could be worth watching out for. As a reminder Dudley last said about two weeks ago that two rate hikes this year was a ‘reasonable’ expectation.

According to Bloomberg calculations, Fed Funds futures show the odds of a move surged to 32 percent on Wednesday, after tripling to 12% from 4% in the prior session as data on inflation, housing starts and industrial production beat forecasts. Following months of expectation and fluctuations last year, including a selloff caused by China’s unexpected devaluation of the yuan, markets reacted calmly when the Fed finally raised rates in December for the first time since 2006, reflecting investor conviction in the U.S. recovery’s ability to withstand tighter monetary policy.

“The markets were getting a little too complacent for the scope for rate hikes this year and next year but the fed minutes were on the hawkish side yesterday so that made investors nervous,” said Allan von Mehren, chief analyst at Danske Bank told Bloomberg. “We see some repricing on bond yields and it’s also having a negative spill-over on equity markets.”

In other, otherwise very bullish news, Moody’s lowers US growth outlook to 2.0% from 2.3% and cuts G20 EM growth to 4.2% vs. Prey. 4.4%, sees China growth slowing gradually to around 6.3% this year. However this time not even a major growth forecast cut was enough to send stocks soaring.

The Stoxx Europe 600 Index dropped 0.8 percent, with BHP Billiton Ltd. and Rio Tinto Group leading miners lower as commodities retreated. The European equity gauge has gone a month without posting a daily gain of at least 1 percent, and is down 4.5 percent from its April 20 peak. Futures on the S&P 500 lost 0.3 percent, indicating equities will decline after Wednesday closing little changed. Investors will look Thursday to an index of leading indicators in the U.S. for signs of the economy’s strength. Fed Vice Chairman Stanley Fischer and New York Fed chief William Dudley are scheduled to speak, while Wal-Mart Stores Inc. is among American companies reporting earnings.

Oil fell below $48 a barrel on Thursday, pressured by a stronger dollar and as a surprise increase in U.S. crude inventories served as a reminder that supply remains ample despite output problems. As Reuters recaps, supply losses in Canada and Nigeria have lent support, but cooler weather was expected to help firefighters battling Canadian wildfires. Traders said Exxon Mobil is boosting output at Nigeria’s largest crude stream.

“The main factor weighing on prices is the much appreciated U.S. dollar,” said Carsten Fritsch, analyst at Commerzbank. “What is more, rain forecast in the Canadian oil province of Alberta is giving rise to hopes that the devastating wildfires there could be brought under control.”

Elsehwere, Egyptian stocks slipped for the first time in four days, falling 2 percent. The government has deployed naval ships to search for an EgyptAir Airbus A320 en route to Cairo from Paris that went missing off the coast overnight.

Market Wrap

• S&P 500 futures down 0.3% to 2035
• Stoxx 600 down 0.8% to 335
• FTSE 100 down 1.5% to 6075
• DAX down 1.5% to 9797
• S&P GSCI Index down 1.6% to 364
• MSCI Asia Pacific down 0.9% to 125
• Nikkei 225 up less than 0.1% to 16647
• Hang Seng down 0.7% to 19694
• Shanghai Composite down less than 0.1% to 2807
• S&P/ASX 200 down 0.6% to 5323
• US 10-yr yield up 1bp to 1.86%
• German 10Yr yield up 2bps to 0.19%
• Italian 10Yr yield up less than 1bp to 1.5%
• Spanish 10Yr yield up 1bp to 1.61%
• Dollar Index up 0.1% to 95.17
• WTI Crude futures down 2% to $47.22
• Brent Futures down 2.3% to $47.82
• Gold spot down 0.3% to $1,254
• Silver spot down 1.5% to $16.65

Top Global News

• Stocks, Bonds, Commodities Slide as Fed Weighs June Rate Hike
• Bayer Bids for $42 Billion Monsanto to Form Life Sciences Giant
• Moody’s Cuts 2016 U.S. Growth Forecast, Cites Weak Global Demand
• Technip to Combine With FMC Technologies in All-Share Deal
• Theranos Corrects Tens of Thousands of Blood-Testing Results
• Dollar Climbs to Seven-Week High as Templeton Backs Divergence
• Trump Invested in Outsourcing Companies He Denounced in Campaign
• Zuckerberg Acknowledges Trust Gap After Meeting on Bias
• Apple, Not China, Is JPMorgan’s Biggest Risk for Taiwan Stocks

Looking at regional markets, Asia stocks traded mostly lower following a subdued lead from Wall Street where US equities pared gains following a hawkish FOMC minutes in which most Fed officials saw a June hike likely if the economy warranted. This initially set the tone across the region with the ASX 200 (-0.6%) dragged by basic materials and energy as a firmer USD post-FOMC minutes weighed on commodities. Nikkei 225 (flat) fluctuated between gains and losses as JPY weakness and strong machine orders provided some optimism in Japan, while Shanghai Comp (flat) outperformed for a bulk of the session after the PBoC continued to up liquidity injections and China continued its supportive sector adjustments. 10yr JGBs saw some spill-over selling, with demand subdued as BoJ refrained from conducting its bond purchase program, while further pressure was seen after the 20yr auction in which the b/c ratio declined from prior.

Top Asian News

• Suzuki Says Improper Mileage Tests Used on 2.1 Million Cars: Testing didn’t follow protocol due to concerns about weather
• Australia Adds More Jobs as Unemployment Rate Holds at 5.7%: Employment data comes in slightly under economist forecasts
• Apple, Not China, Is JPMorgan’s Biggest Risk for Taiwan Stocks: Foreign investors pull $2.2 billion as Apple suppliers fall
• BEA Union Cuts China Property Bond Exposure on Valuation Concern: Holdings in key fund 33 percent versus 55 percent last year
• Two Chinese Fighters Intercept U.S. Plane Over South China Sea: Encounter in international airspace could further strain ties
• Modi Set for Lone India State Win as Regional Parties Dominate: Modi’s BJP is ahead in Assam in 126-member state assembly
• Vale Delivers Warning on Iron Ore After China Frenzy Fades Away: Watch out for bumpy road ahead as low-cost supply is set to pick up

European equities have slipped this morning following the fallout of the more hawkish than expected FOMC meeting minutes, having kept June as a live possibility to tighten monetary policy. Subsequently, FFR futures are now pricing in a 32% chance of a hike next month, as such financials outperform amid the prospect of higher borrowing costs for consumers. However, failed to offset the weakness across material names as they are hampered by the fall in commodity prices in reaction to the upside in the greenback. Additionally, notable weakness has been seen across airliners in the wake of reports of a missing EgyptAir flight, while Thomas Cooks underperforms in relation to other airliners after their CEO stated that FY underlying earnings is at the lower end of guidance. Despite the downside in equities European bonds have been pressured this morning amid the rise in yields, with Bunds yields bear steepening across the curve, which comes after the aforementioned hawkish FOMC minutes. Furthermore, desks are also attributing some of the price action to technical factors with downside limited by support holding around 163.00.

Top European News

• European Stocks Slide as Fed Minutes Signal June Hike Possible: Stoxx Europe 600 Index lost 0.5 percent at 9:23 a.m. in London, with commodity producers declining the most
• Bayer Eyes $42 Billion Monsanto in Quest for Seeds Dominance: bold attempt by Bayer to snatch the last independent global seeds producer and become the world’s biggest supplier of farm chemicals
• Investec’s Full-Year Profit Rises 3% as Bank Lending Increases: Net income for the 12 months ended March 31 rose to 423 million pounds ($616 million) from 410 million pounds a year earlier

In FX, the Japanese yen has been modestly stronger overnight, with the USDJPY trading closely around 110, following a 1 percent slide in the last session when it hit 110.40 following the Fed minutes.  Australia’s dollar weakened as much as 0.5 percent, and the MSCI Emerging Markets Currency Index fell 0.5 percent, taking its retreat in May to 3 percent. Indonesia’s rupiah and South Korea’s won led declines on Thursday, weakening at least 0.8 percent.

But the overnight highlight as previosly reported was China’s yuan which declined as much as 0.1 percent in Shanghai’s onshore market. It was more volatile in offshore trading, rebounding 0.3 percent after a 0.5 percent loss on Wednesday that marked its biggest decline since January. South Africa’s rand climbed 0.4 percent, paring this month’s slide to 10 percent, the worst performer among 31 major currencies worldwide. While the central bank will probably keep interest rates unchanged on Thursday, six of the 25 estimates from economist in a Bloomberg survey predict a quarter-point increase. The rest see the benchmark remaining at 7 percent.

In commodities, WTI dropped 2.2% to $47.15 a barrel, extending Wednesday’s retreat from a seven-month high. The dollar’s increase coupled with renewed concern over the global oil glut unsettled markets, with U.S. crude inventories unexpectedly rising by 1.3 million barrels last week, according to data issued on Wednesday. Rain in Canada may have also slowed fires that have shifted back toward the province of Alberta’s oil-sands operations. Copper, nickel and zinc fell by at least 0.8 percent in London. Gold slid to a three-week low on concern the Fed is moving closer to raising interest rates. Metal for immediate delivery fell as much as 0.5 percent to $1,252.42 an ounce.

Bulletin Headline Summary from Bloomberg and RanSquawk

• European equities follow suit from the fallout of the hawkish FOMC minutes release, with Bunds also softer despite capping losses after finding support at 163.00
• GBP has been another source of focus for FX markets in the wake of upbeat UK retail sales while USD remains firmer against its major counterparts
• Looking ahead, highlights include ECB Minutes, Initial Jobless Claims, Fed’s Fischer (Voter, Neutral), Dudley (Voter, Soft Dove) and BoE’s Vlieghe (Dove)
• Treasuries fall during overnight trading, with global equities dropping to six-week low and commodities lower against a stronger U.S. dollar as the world braces for the possibility that the Fed may raise rates in June.
• An EgyptAir Airbus A320 en route from Paris to Cairo with 66 people on board went missing over the Mediterranean Sea in cloudless stable weather, raising concerns of a crash caused by a deliberate act or mechanical failure
• Federal Reserve officials want to raise interest rates in June. Now, it is up to the U.S. economy to confirm their view that slow growth in the first quarter was temporary;
• Moody’s Investors Service lowered its growth forecast for the U.S. economy this year to 2 percent from 2.3 percent to account for a weak first quarter, while anticipating underlying resilience through 2017
• Is the link between monetary policy and inflation broken? The central bank governor of Denmark, where nominal rates have been negative longer than anywhere else in the world, says there may be signs that the link has grown weaker
• The BOJ must drastically lower its presence in the nation’s stock market if it wants to preserve the ability to one day unwind its massive position, according to the Democratic Party’s Tsutomu Okubo, a former vice finance minister
• Given the uncertainty of Brexit’s potential impact, a vote to leave is a risk. The question is: Is the risk worth taking?
• Euro-area officials are weighing a proposal to purchase loans that member states made to Greece in a move that would ease the nation’s debt burden, a precondition for the International Monetary Fund’s involvement in a bailout program
• Quiet trading floors are set to depress global investment banks’ second-quarter revenue 24 percent, with the underwriting and equities businesses facing the biggest drops, according to analysts at JPMorgan Chase & Co
• Sovereign 10Y yields lower; Asian, European equities mostly lower; U.S. equity-index futures lower; WTI crude oil, precious metals fall

DB’s Jim Reid concludes the overnight wrap

Before we move onto a hawkish Fed and a continuation of the sudden and sharp re-pricing of interest rate risk, this morning we have published the fifth edition of DB’s annual survey of global prices of goods and services which my team has now taken over. This year we have added a number of extra European cities. In adding these it confirms that Europe is an expensive place to buy things. Indeed Swiss and Nordic/Scandinavian cities are generally the most expensive in the world. Sydney and London also require a bulging wallet. EM countries remain the cheapest places overall though and the gap between DM and EM prices has mostly widened over the past 4 years helped by the latter’s currency and economic weakness.

Our weekend getaway index neatly reflects the general cost of living around the world. Zurich leads the way, followed by Sydney, London, Milan, Stockholm, Copenhagen, NYC, San Francisco, Amsterdam and Madrid. Our cheap date index sees Zurich, Copenhagen, Tokyo, Stockholm and Amsterdam as the most expensive cities to woo a partner. At the other end of the scale, cities in Malaysia, India and South Africa are the cheapest for a weekend away and around a third of the cost of the most expensive places. For those wanting a real cheap ‘cheap date’, India, Indonesia, the Philippines and South Africa are the places to go. Indeed in all of these places you can have at least 4 dates for the price of one in Zurich but please don’t tell the other 3 people! Indeed if someone asks you out on a date in Zurich please clarify who is paying before accepting.

Elsewhere we look at the price of numerous goods and services across the world including iPhones, jeans, trainers, cars, Coke, meals out, cinema tickets, taxis, public transport, beers, cigs, gym membership, a haircut, the economist and the price of attending business school. Is your country cheap or expensive in these areas? See the report published in the last hour to find out.

So the merry dance starts. The Fed minutes last night highlight a committee that continues to want to raise rates whenever they can push it through. However what normally happens after such hawkishness in the current environment is either the data doesn’t ever quite get there for them to pull the trigger or the global market takes fright by enough for them to have to postpone their plan. I’m not sure this time is any different but clearly you can try to trade the volatility between the two points. Indeed the probability of a June hike has moved from 4% on Monday to 32% after last night’s minutes. Contracts further out in the year have also seen a reasonable re-pricing. The probability of a July move is now up to 47% from 28% just prior to the minutes and 19% on Monday, while a move by December has gone from 56% at the start of the week to 65% on Tuesday and to 75% post minutes.

Fixed income markets were the big mover yesterday. Looking at Treasuries the 2y yield was up another 6bps yesterday to 0.894% which is the highest yield since mid-March. In fact yields at the short-end of the curve are up an impressive 15bps since the close last Friday. The 10y yield yesterday was actually up 8bps by the end of play at 1.855% and approaching the top end of the recent range. FX markets were also particularly active and unsurprisingly it was a relatively strong day for the US Dollar with the Dollar index up +0.56% with EM currencies hit hardest across the board.

In terms of the important stuff, much of the focus was on the line concerning that ‘most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labour market conditions continuing to strengthen, and inflation making progress towards the Committee’s 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June’. That said there was a bit of balance in that comment with the sentence that ‘participants expressed a range of views about the likelihood that incoming information would make it appropriate to adjust the stance of policy at the time of the next meeting’ with some officials expressing confidence that the incoming data would be sufficient enough to make a June increase appropriate, but offset by ‘several participants’ who seemed more concerned that the data would not provide ‘sufficiently clear signals’ to determine if a move next month is warranted. Some also cited concern about the low implied pricing in futures markets, while it was noted that participants viewed downside risks from abroad as having reduced, but that close monitoring is still warranted’.

So it’s over to the data now and the continued flow of Fedspeak. As we highlighted yesterday comments from Fed Vice-Chair Fischer and President Yellen will likely be crucial in terms of really hammering home expectations and we’ll hear from the former this afternoon. Fischer’s event is closed to media so it remains to be seen how much he’ll delve into policy outlook but we will also hear from Dudley this afternoon who’s views are closely aligned to those of Yellen so that could be worth watching out for. As a reminder Dudley last said about two weeks ago that two rate hikes this year was a ‘reasonable’ expectation.

Refreshing our screens this morning, aside from China the vast majority of bourses in Asia are in the red this morning. There are modest losses for the Nikkei (-0.05%) and Hang Seng (-0.24%), although the Kospi (-0.54%) and ASX (-0.70%) are down a bit more. China is the outlier again with the Shanghai Comp currently +0.58% with Bloomberg reporting that steelmakers in particular have surged following the news that President Xi is to push ahead with plans to reduce overcapacity at SOE’s and so support commodity prices. US equity index futures are modestly lower this morning, while the US Dollar has continued to gain.
Recapping the rest of the moves in markets yesterday. US equities were initially putting in a relatively strong performance leading into the minutes with the S&P 500 up as much as +0.6%. That quickly changed once the text was released however with the index actually plummeting to a -0.6% loss before paring that move to finish pretty much unchanged (+0.02%) by the end of play as a strong session for banks helped to offset weakness for utility and telecom names. The commodity complex was also hit hard with WTI creeping back below $48/bbl this morning (down about 2.5% from just prior to the minutes) after being weighed down by those US Dollar gains, while in the metals space it was precious metals which declined the sharpest. Gold, Silver and Platinum ended -1.60%, -1.99% and -2.45% respectively.

Moves for European equities look a bit outdated now although we did see bourses finally break out with the Stoxx 600 closing +0.85% with Banks gaining on the prior day’s Fedspeak. Meanwhile there was some data released in Europe yesterday to mention. There were no changes in the final revisions to Euro area CPI in April with the monthly headline reading of 0.0% mom meaning the YoY rate was confirmed at -0.2% and down two-tenths from March. The core print was also confirmed +0.7% yoy which is down three tenths and is the lowest print in 12 months. The other data was out of the UK yesterday with the release of the latest employment report. The ILO unemployment rate was unchanged in March as expected at 5.1%. Employment was reported as rising 44k in the first quarter compared with the three months to December which was better than expected, although surprisingly average weekly earnings ex bonuses did slow to 2.1% yoy from 2.2% after consensus had been for modest growth.

Looking over today’s calendar, this morning we’re kicking off in Europe where shortly after this goes to print the Q1 employment figures from France are released. Following that later this morning will be April retail sales data out of the UK which is expected to rebound. That comes before the ECB minutes which are due to be released around lunchtime. Over in the US this afternoon the Philly Fed’s manufacturing survey will be closely watched especially considering the weakness in the NY Fed survey earlier this week. We’ll also get the latest initial jobless claims numbers which are expected to come back down again following the big spike higher in the last reading, while the Conference Board’s leading index for April rounds off the data. As mentioned earlier, Fedspeak wise we will hear from Vice-President Fischer who is due to speak at 2.15pm BST, while Dudley (at 3.30pm BST) is also scheduled for comments today.