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Stock markets are retreating as Wall Street equity futures dip further from this week’s record high and investors cash in some of their bullish bets on stronger growth following the election of US president Donald Trump.

A speech scheduled later by Fed chief Janet Yellen will be the next big event for markets, with the possibility that she could confirm red-hot expectations for a fresh rate rise later this month.

Writes Kit Juckes at SocGen:

[She will] either endorse the market’s embrace of a March rate hike, or put a huge cat in among the pigeons. We get Stan Fischer half an hour earlier in New York, and we’ve got non-manufacturing ISM data in the US, and services PMIs around Europe, but it’s Janet’s moment.

US markets have been the focal point for investors this week. Major Wall Street measures closed at record highs on Wednesday, with investors taking heart from the relatively conciliatory tone in US President Donald Trump’s address to Congress the night before.

Stocks appeared unfazed by a lack of fiscal policy clarity as well as commentary from US central bank officials suggesting a rate rise was imminent.

But the swiftness and extent of the rally — US equities were up 12 per cent since Mr Trump’s election victory in November — left some analysts suggesting the market looked a bit over extended.

By the time the S&P 500 finished Wednesday’s session at 2,396, its best ever close, the benchmark’s 14-day relative strength index, a closely-watched momentum gauge, was up to 81.7. That was way above the supposedly “overbought” threshold of 70 and it was the RSI’s highest mark in more than two decades.

Sure enough, Thursday saw the S&P 500 slip 0.6 per cent, and futures on Friday indicate it will ease a further 0.3 per when trading gets underway later in New York.

Currency trading this week has been dominated by prospects for the US dollar after investors slashed the odds of a March interest rate rise by the Federal Reserve.

Fed chair Janet Yellen is due to make a speech later on Friday, and traders don’t expect her to say anything that would challenge the market’s pricing of there being a 77.5 per cent chance of a 25 basis point rate increase on March 15, according to CME FedWatch.

The dollar index, a measure of the currency against a basket of global peers, is down 0.2 per cent to 102.00, having risen more than 1 per cent over the previous two sessions.
The euro is up 0.2 per cent to $1.0524 and the Japanese yen is 0.2 per cent firmer at ¥114.13 per buck, breaking four straight days of decline after data released on Friday showed core inflation in Japan had turned positive for the first time since December 2015.

Fixed income
The Fed rate hike expectations have also been forcing government bond yields higher, but here too the recent trend is being trimmed.

Yields on US 10-year Treasuries, which move inversely to price, are easing 1 basis point to 2.48 per cent. The more policy sensitive US 2-year yield, which on Thursday hit a seven-year intraday high of 1.34 per cent, is off 1bp to 1.31 per cent.

German 10-year Bund yields are dipping 1bp to 0.31 per cent but are still up 12bp over the week.

The prospect of tighter US monetary policy has also led to a sell-off in gold. The yellow metal’s 1.2 per cent fall in the previous session was its largest one-day drop since mid-December and it is sliding a further 0.6 per cent on Friday to change hands at $1,228 an ounce.

Oil prices are recovering after a more than 2 per cent drop on Thursday, which followed news of record US stockpiles. Brent crude, the international benchmark, is up 0.3 per cent to $55.27 a barrel, while West Texas Intermediate is adding 0.4 per cent to $52.80.

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