Markets shifting around spike in global bond yields

Global markets churning and repositioning

Financial markets are churning about right now, as attitudes towards the outlook for the trade-war, global monetary policy, and therefore global growth change. Looking at stock markets, one might assume sentiment is a trifle bearish at the moment. But looking beyond the activity in equities, and it might be said that market participants are actually toning down some of their more bearish impulses. A slowdown in the global economy remains the default position, with fundamentals still uninspiring. However, the timing and severity of this slowdown seems as though it’s being revised, and that’s opening the possibility of greater risk-appetite in global markets, in the near-term.

Bond yields rallying as safe-haven trade unwinds

Stock markets are down across the globe on a big repositioning in broader financial markets. The relative silence on the trade-war front this week has halted the safe-haven momentum trade into government bonds, sparking a lift in yields across the globe. Investors are betting on a very marginal improvement in the global growth outlook, and therefore slightly less dovish global central bank policy. The yield on the US 10 Year Treasury note, just as one example of the dynamic, has spiked almost 30 points in a week, as traders bet that the Fed will only cut rates twice before year end.

Climbing bond yields weighing on stocks

The climb in “risk-free” rates across the world is what’s driving the pullback in stock indices. The equation has flipped somewhat “internally” within stock markets – those areas of the market that were rallying because of falling global interest rates are now declining, dragging broader indices down. While a nuisance for market-bulls in the short-term, this behaviour may set stock markets up for good things to come. A complete turnaround in the downward trend for interest rates and bond yields isn’t expected. Hence, this change in sentiment towards economic growth may underpin a more sustainable rally in stock markets in the months to come.

Sentiment still rests on outlook of trade-war and central banks

This of course relies on two key variables. One: the trade-war stops escalating. Two: central bankers still ease financial conditions sufficiently. The latter variable comes into focus in the next fortnight, as the Fed and ECB meet, and likely cut interest rates. Provided both these core issues remain stable, the bull run in global stocks may have life in it, yet. Holding previous levels of resistance in stock markets should be seen as the measure by which the strength equity indices are gauged. For the benchmark S&P 500, the line in the sand is roughly 2950. For our ASX 200, it ought to be roughly the 6600 mark.

Broader market pricing also determined by moves in bonds

The signs that this will come about are so positive. The S&P 500 rallied in the moments before Wall Street’s close, generally a good sign the buyers are in control of the market. In broader financial markets, the repositioning in global bond government bonds is creating waves in FX, commodity and even crypto markets. The Yen has pulled back as safe haven demand diminishes. Gold is looking at a significant, albeit short term, dip, trading well below $US1500 now. And Cryptos were smashed during last night’s session, with Bitcoin plummeting over 2% in the space of minutes in late Wall Street trade.

You’re fired! Trump ousts Bolton

A handful of smaller stories also moved markets last night. US President Donald Trump fired his divisive Security Advisor John Bolton, citing “differences” in policy. Bolton is a big military hawk, with a special disdain for China. How this impacts markets in the long-run is up in the air, because it does depend on who replaces Bolton now. But the first signs seem to be that this will mean a less belligerent America on the world stage. Case in point: oil prices fell on the news of Bolton’s sacking overnight, as traders bet that it means a more conciliatory approach to issues in the middle east – particularly as it relates to Iran.

Niceties being exchanged between the US and China

One assumes to that this may be less frosty US-Sino relations as well. It won’t solve any problems between the US and China, Bolton not being around. But it may mean that the two trade war combatants start playing a little nicer. Some niceties were exchanged last night – though this was unrelated to Bolton’s departure. A sprinkling of market moving (read: manipulating?) stories about US-China trade is boosting sentiment. The first was some friendly commentary from Treasury Secretary Steven Mnuchin about trade-talks and US-China relations. Last night, they pertained to headlines that the Chinese has pledged to buy more US agricultural goods.