Stocks Tumble, Yield Jumpe, Dollar Consolidates Ahead Of Major Data

Speculation of the timing when Fed will taper the asset purchase program remained a main market theme. The U.S. equities' rally attempt was limited below last week's high. The DOW and S&P 500 indeed suffered steep selloff towards the end of the week. The DOW closed the week at its weekly low at 15115.57, down 188 pts. The S&P 500 also closed at the weekly low at 1630.7, down 19 pts. The Treasury yield extended the recent rally with 30 year yield rose to 3.308% and 10 year yield up to 2.164%, both making new 2013 high. In commodities, gold jumped back above the 1400 level, but failed to sustain above there and closed at 1388. Crude oil, on the other hand, dropped sharply to close at 91.61.

The steep selloff in stocks suggested near term topping. However, the dollar was supported by surge in treasury yields and the correction in greenback was relatively limited. The greenback seemed to have regained some strength towards the end of the week as yields broke into a new high. The yen continued to consolidate against other major currencies. Overall, the Kiwi with the weaker currency last week with NZD/JPY down -2.65%, NZD/CHF down -2.39%.

Our strategy of long USD/JPY yielded no result for another week. The USD/CAD long and AUD/USD short were correct even though both the Aussie and Loonie recovered after an initial fall against dollar. We expect a further steep pull back in equities to continue to pressure commodity currencies. Meanwhile, the consolidation in both the EUR/USD and GBP/USD seem to be ending, if it hasn't already. We expect the dollar to regain strength against them in near term. We continue to stay USD/CAD long and AUD/USD short for extending the recent move. Meanwhile, we'll close out USD/JPY long on risk that selloff in equities could trigger more safe haven flow back to the USD/JPY.

Three central banks are slated to meet this week. The RBA's cut in May significantly lowered the chance of any change in policy this month, and the central bank should stand pat. The BoE is expected to keep rates and the asset purchase program unchanged, a non-event by all standards. The ECB is expected to keep rates unchanged too. There has been continuous speculation on negative deposit rates so Draghi's press conference will be uscanned for hints. Meanwhile, U.S. economic data will probably be the main driving force behind all markets, with ISM indices and NFP featured. These data would be important in gauging market expectations on Fed's timing of stimulus exit.

Last week's recap: The OECD lowered the global growth forecast to 3.1% in 2013 and 4% in 2013. That's revised from a prior projection of 3.4% in 2013 and 4.2% in 2014 respectively. Chief economist Pier Carlo Padoan noted that the "global economy is moving forward and it is doing so at multiple speeds" with "each path carrying its own mix of risks". U.S. growth is expected to be 1.9% in 2013, 2.8% in 2014. That's revised down from prior projection of 2.0% in 2013. It warned that "exit from unconventional monetary policy, when needed, may be difficult to manage and less smooth than desirable, possibly leading to sharp rises in bond yields and serious negative consequences for growth." The eurozone growth projection for 2013 was revised to -0.6%, down from prior -0.1%. 2014 growth was also revised to 1.1%, down from prior projection of 1.3%. It said, "ECB could consider buying government bonds of all euro area members on a non-discriminatory basis for monetary policy purposes." Japan's GDP is expected to grow 1.6% in 2013, revised up from prior forecast of 1.4%. 2014 projection for Japan was unchanged at 1.4%. China growth is projection to be 7.8% in 2013, down from the prior figure of 8.5%.

IMF lowered its growth forecast for China. The fund cut China's 2013 GDP growth projection to 7.75%, down from 8.00%. 2014 growth is projected to grow at "about the same pace". IMF deputy managing director Lipton said the lowered projection "comes essentially from looking at the global economy and the pace of growth in the global economy, as well as the demand that derives from that growth for Chinese exports". Meanwhile he urged China to have "continued liberalization" and "reduced government involvement". He added that China needed "a decisive push to promote rebalancing" towards higher household incomes.

In the U.S., Boston Fed President Rosengren stated that while it may be "undesirable to abruptly stop purchases", he believed it makes sense to "consider a modest reduction in the pace of asset purchases if we see a few months more of gradual improvement in labor markets and improvement in the overall growth rate in the economy". Data from US saw the Q1 GDP revised slightly lower to 2.4%, while the price index was revised low to 1.1%. Initial jobless claims rose more than expected to 354k in the week ending May 24. Continuing claims rose 63k to 2.99m in the weekended of May 18.

In the eurozone, unemployment rate rose to new record high of 12.2% in April, inline with expectations. The Flash CPI rose back to 1.4% yoy in May. Italy sold EUR 3b in 10-year bonds on Saturday, with average yield at 4.14%, up from last month's auction at 3.94%. Demand was down slightly with bid-to-cover ratio at 1.38 times, compared to prior 1.42 times. It also sold EUR 2.75b in five year bonds with yield at 3.01%, up from prior 2.84%. Overall, the sale met maximum target and is seen as solid by markets.

The BOC left the policy rate unchanged at 1% in May. Policymakers maintained the stance that both growth and inflation were inline with projections and the economic recovery remained in progress, albeit slow. Similar to the previous statement, the central bank viewed that it is appropriate to keep interest rates low, but affirmed that "some modest withdrawal will likely be required". This has made the BOC the only G7 central bank signaling a tightening stance on the next move. This is the last meeting for Governor Mark Carney as he departs for his new role as the BOE Governor starting July. The incoming BoC Governor is Stephen Poloz, the current Export Development head. M

The Japanese inflation outlook showed improvement, as indicated in the April CPI data. Deflation improved slightly with core CPI falling -0.4% y/y, easing from a -0.5% y/y decline in March. CPI excluding food and energy added +0.3% m/m. Overall CPI slipped -0.7% y/y, following a -0.9% drop previously. The improvement was driven by a lesser drop in fresh food prices which fell -7.9% following a -11.5% decline in the prior month. The May Tokyo CPI, the leading indicator of Japan's inflation, showed a +0.1% y/y rise (or 0.3% m/m) in core CPI.

In New Zealand, RBNZ governor Graeme Wheeler said that the central bank is "prepared to scale up" intervention to "dampen some of the spikes in the exchange rate". It's reported that RBNZ sold as much as NZD 256m in April, the largest number since May 2008. Such a number is viewed as small by the markets which questioned the RBNZ's commitment.