There are two pivotal events currently influencing US equities and causing a notable decline in US yields. The first is the emergence of Chinese-made artificial intelligence (AI), particularly DeepSeek, which is reportedly more cost-effective, energy-efficient, and faster than its competitors. This innovation suggests a shift beyond mere replication in AI technology. The second significant development involves Colombia's initial refusal to accept US military flights returning illegal immigrants, leading to tariff threats from the Trump administration. Although Colombia ultimately capitulated, the situation initially strengthened the dollar, which later lost most of its gains as the issue was resolved.
Asia Pacific Markets
In the Asia Pacific region, currency movements have been influenced by recent economic data and geopolitical developments. The Chinese yuan has found some support as the People's Bank of China adjusted its reference rate to stabilize the currency amid a dollar pullback. This tactical move aligns with efforts to maintain a steady dollar-yuan exchange rate while bolstering the stock market to attract capital. However, China's manufacturing Purchasing Managers' Index (PMI) fell below the critical 50 mark, indicating contraction.
In Japan, the yen has strengthened against the dollar as US rates decline, pushing the exchange rate lower within recent ranges. This shift is expected to make the yen more sensitive to long-term US rate movements, especially given a light economic calendar ahead.
European Markets
In Europe, market sentiment is shaped by expectations surrounding monetary policy changes from the European Central Bank. This has led to a bullish sentiment for the euro, pushing it above $1.05 after testing initial support levels. The narrowing gap between US and German bond yields has contributed to this trend, with the two-year US premium over Germany decreasing significantly.
Meanwhile, sterling has seen its highest close since early January, driven not by domestic developments but rather by a broader retreat of the dollar. The technical outlook for sterling appears positive, with potential targets set around $1.2575-$1.2610.
American Markets
In the US markets, the Dollar Index has experienced its first back-to-back weekly loss since late September as technical indicators show a deteriorating tone. A critical resistance level at 107.75 must be surpassed for any stabilization in sentiment; otherwise, it could drop towards 105.25. Recent tensions with Colombia over deportation flights briefly impacted dollar strength before a resolution saw it slip back to around 107.35. Market participants are cautious ahead of upcoming economic data releases and potential policy shifts from the Federal Reserve and ECB later this week. Overall, today's new home sales and regional Fed surveys are unlikely to significantly sway market dynamics ahead of these critical meetings.