Volatile US session as risk assets decline on a Fed “re-pivot” and US-China tensions

US equities had a volatile and ultimately negative session as an early rally faded dramatically on the back as a combination of hawkish Fed member comments and geopolitical tensions saw risk assets take a dive.

It was a classic risk off session that saw equities, crypto and cyclical currencies take a hit and the safe haven USD rally strongly. Bonds also sold off with the 10 year T-Note dropping as the yield rising 17.5bp (bond price and yield is inverse) over the session as hawkish comments from Fed members Daly, Mester and Evans saw chances of a Fed pivot to the dovish side diminish.

US-China tensions also weighed on the markets due to the visit of Nancy Pelosi to Taiwan which saw the island harried by Chinese military aircraft.

In the FX market against this backdrop, the US Dollar index strengthened amid safe haven demand,  The EUR suffered against the firmer dollar and fell beneath the 1.0200 level and the JPY resumed its depreciating trend as bond yield differentials widened. Fading optimism also saw the AUD crash back below the psychological US 70c level where the Bulls and Bears have been slugging it out in recent sessions.

Whether this level ultimately establishes itself as support or resistance will likely set the tone of AUD price in the near-mid term.

Looking ahead it seems that this market sentiment will remain with Asian and Australian markets opening lower and US futures in the red, at least until Pelosi departs for the rest of her Asian tour.