Oil Prices Above $70, Causing Sell-off in Stocks, Bond Yields and US Dollar

The last trading of the second quarter lived up to its reputation for delivering sharp volatility to the financial markets. Today, US equities went from being up over 50 points to down over 100 points before ending the day only slightly lower. Oil prices broke above $70 barrel while bond yields dropped by the largest amount since mid March.

These factors along with weaker US personal income and personal spending data sent the dollar tumbling against the Euro, British Pound and Japanese Yen. Trading can be particularly active on the last trading day of a quarter, but add on a foiled car bombing attack in London and it is not surprising to see profit taking and liquidation. However the strength of the rebound in the stock market and the resilience of carry trades in general suggest that the market?s appetite for risk may not have reached its peak. Of course, this will be dependent upon how many more bombs are found in London and whether the situation escalates. If it does not, then the focus of the market will shift back to inflationary pressures. With oil prices at a 10 month high, it will not be long before the national average of gasoline prices moves back above $3 a gallon. The combination of rising corn, dairy and gasoline prices will certainly keep the Federal Reserve and probably many other central banks around the world hawkish. This means interest rates in these countries will either remain high or be increased over the next 6 months. Even though personal income and spending both fell short of expectations in the month of May, the gap between the two improved significantly and both the Chicago PMI and construction spending reports were stronger. Next week we have non-farm payrolls. Traders can look at the employment components of the manufacturing and service sector indices as well as the ADP survey to gage how non-farm payrolls may fare. Right now the market is looking for softer but healthy job growth. Throughout next week we will be covering this in detail on DailyFX.com.