Today's Key Points

Daily Forex Fundamentals | Written by Danske Bank | Jul 08 08 07:05 GMT |

* Fed's Yellen destroys positive equity sentiment - S&P500 drops 0.8%
* Largest US mortgage finance companies, Fannie Mae and Freddie Mac, fall to lowest in 13 years
* Today, US tier 2 data should attract most attention in a light data calendar

Markets Overnight

The US equity market begun the week on a positive note, but started dropping in the middle of the session as sentiment again shifted to negative. Financial companies led the decline and the S&P500 Financials Index fell to a five-year low. Info-tech companies advanced the most, but not enough to reverse the negative trend. The total index lost 0.8%.

The turnaround in sentiment could largely be attributed to Fed's Yellen (non-voter, dove), who gave a rather gloomy speech on the prospects for the US economy as she attached little confidence in a near-by end to the housing market crisis. She further said that things could worsen further before improving. Perhaps not her best day.

Freddie Mac and Fannie Mae fell to the lowest level in 13 years as concerns grew that the two largest US mortgage finance companies may need to raise more capital to overcome writedowns and satisfy new accounting rules. Freddie Mac fell 18% while Fannie Mae dropped 16% after a report yesterday indicated that an accounting change may force them to raise a combined USD 75bn.

But it is an ill wind that blows nobody any good, and oil prices fell to around USD 142 per barrel. The price dipped even below USD 140 per barrel for a short while. The decline in crude oil prices should be seen in relation to a larger drop in all commodities, led by grain futures. In fact, prices are falling at a speed not seen since March. It is the outlook of a good harvest in the US Midwest that keeps commodity prices in check.

Treasuries fell slightly yesterday, with yields now near a one-month low. The yield on the 2Y note dropped around 10bp while the yield on the 10Y note retracted 7bp. Investors have increased confidence in a Fed on hold for a longer while. The market-implied probability for unchanged rates at the next two meetings has risen above 50%.

FX markets have been rather calm overnight with only minor movements. EUR/USD has drifted a little downwards, now trading just around 1.57. GBP, which came under pressure after yesterday's industrial production data, opens up at 0.7950 against EUR. Scandies are bouncing due to thinner markets, but the pairs are in wellknown territory with EUR/SEK at 9.42 and EUR/NOK at 7.99.
Global Daily

Today we will see data releases that will surely paint a gloomy picture of prevailing economic conditions. In the US, pending home sales data and consumer confidence data are out, and we will also see consumer confidence data in the UK along with house price statistics. A reminder of the state of the housing market in the US and the UK in combination with renewed focus on hardship among mortgage providers is likely to be bullish for yields, and thus offer support to our bullish basic outlook for the bond market. The spring bear market may prove to have been ‘false start', and we maintain our case that a continued deterioration of the economy and a persistent financial crisis should keep the Fed from hiking rates any time soon.

Fed chairman Bernanke speaks at FDIC Forum on financial regulation and mortgage lending while Fed's Lacker speaks on the economic outlook in Washington.

The data calendar for Europe is very thin today.

Danske Bank
http://www.danskebank.com/danskeresearch