A Paradigm Shift?

Ashraf's warnings about elevated volatility proved true with a rout in stock markets to close out the week. The Dow Jones Industrials Average opened 350 pts down today, following a sea of red in Asia and Europe. DOW30 is down 0.7% but S&P500 is down 2.0%. Fears of rising yields continue to be the main catalyst. Markets turn to the services ISM.

Non-farm payrolls had plenty of good news for the US economy and USD. The dollar jumped after 200K jobs were added compared to 180K and, more importantly, wage growth jumped to 2.9% compared to 2.6% expected. One big caveat was that wage growth was heavily concentrated in supervisory jobs but it's still a reason for a more-hawkish tilt at the Fed.

What was disappointing for dollar bulls was the inability to extend the dollar gains after the initial knee-jerk. The euro nearly recovered all the losses and USD/JPY climbed 60 pips only to give half of it back. There were stronger signs against the commodity currencies but that was also fueled by risk aversion.

So what set off the fears? There are worries about the Trump-Russia story again but as markets open for the week, neither Rosenstein nor Mueller have been fired, so that should dissipate. The larger worry is in bonds as US 10-year yields rose 6 bps on Friday to 2.84% despite the 2% fall in stocks.

It's been more than a decade since bonds and stocks were capable of selling off together and the takeaway is that inflation and rate hike worries are suddenly very real.

CFTC Commitments of Traders

EUR +149K vs +145K prior GBP +32K vs +33K prior JPY -114K vs -123K prior CAD +33K vs +23K prior CHF -20K vs -22K prior AUD +13K vs +17K prior NZD +3K vs -1K prior

Friday was a great test for the euro bulls. It could have easily turned into a rush to the exits; instead, the euro bulls regrouped in an impressive showing.