Trader thoughts - the long and short of it

Treasury sell-off: It’s begun with the bond market – not in Europe this time, but in the booming United States. There doesn’t appear to be a discernible flashpoint that’s sparked this, but nevertheless and for whatever reason, bond traders have hit the sell button on US Treasuries. The phenomenon can be witnessed across the curve, with US 2 Year Treasury yields climbing to levels not seen since 2008 at 2.86 per cent, the benchmark US 10 Year Treasury yield hitting levels not seen since 2011 at 3.15 percent, and US 30 Year Treasury Yields clocking-in levels not seen since 2014 at 3.31 per cent. As one can safely assume, the DXY has rallied on the developments, pushing to a 6-week high just shy of 95.80.

It’s growth, not inflation: An explanation for the sudden frenzy in fixed income markets is being foraged for. The concern in these situations is that such a move could indicate strife: something tied back to fears uncontrollable inflation, or a reflection of a higher likelihood of US fiscal deterioration. To the relief of market participants however, the consensus regarding the moves overnight is an optimistic one: traders are buying into the Fed’s “growth, growth, growth” view expounded over the last week, and are as such pricing in the prospect of higher US rates. Although myriad of risks now emerges for other asset classes as a consequence to the (apparently) inexorable rise in yields, the underlying reasons should be cause for a calm and collected cheer.

Wall Street: How the rally in bond yields, provided it continues, manifests in US equity markets will become the centre of concern, one would imagine, in coming days and weeks. US indices faded into the close last night as the Treasury sell-off took hold, with the benchmark S&P 500 closing only a fraction higher for the day. Both the Dow Jones and NASDAQ put-in a better performance for the session, posting gains of 0.2 per cent and 0.3 per cent respectively – the former registering new all-time highs in the process – but pulled-away notably from intraday highs at the back end of the trading day. Interest rate sensitive and high growth sectors underscored the day’s volatility, as financial stocks climbed along with information technology and industrial stocks; while real estate and consumer sectors suffered under the assumption higher US rates will weigh on property markets and consumption.

The Fed and the stock-market: An implied maxim of the US Federal Reserve that elegantly describes last night’s trading dynamic (the articulation of which is often attributed to Ex-Fed-Head Alan Greenspan) is that the role of Fed is to “take away the punchbowl when the party is getting started”. It was this abstraction that was philosophically behind this year’s stock market correction in February and caused investors to flee from equity assets. Markets appear more circumspect at the moment, galvanized by a booming US economy, and higher corporate profits buttressed by US President Trump’s stimulatory tax cuts. Consensus is still that the times won’t immediately change for the US stock market, with valuations forecast to tighten as earnings keep improving. Even still, as the US equity bull market charges forward, an anxiety that will hover over markets will be whether the Fed’s determination to “normalize” interest rates will sober investors’ euphoria.

ASX: The lead set by the heavy activity on North American markets overnight has SPI futures indicating a 14-point jump for the ASX 200 at market open. Australian shares managed to recover territory yesterday, led by a catch up by materials stocks to the global recovery in commodities prices, coupled with a more general recalibration across the index following Tuesday’s bank led sell-off. The fortunes of the financial sector will be of interest today given the tick-up in global bond yields: the circumstances should lead to a favourable view of future bank profitability, but with the Royal Commission still overhanging the industry, perhaps this will be ignored. The ASX 200 closed the day at 6146 yesterday, bouncing off support at 6120: previous support at 6160 may prove formidable resistance here and should be watched closely by technical traders.

Oil rallies, EUR stable: There were a variety of other stories occupying traders last night that are worth touching on briefly. US Crude Inventory data was released, showing a surprise increase in oil stock piles. Despite this, the price of oil maintained its upward momentum, driven by the belief that blips in inventory data won’t change the structural problems caused by low production and undersupply. The other unfolding story that is moving markets is the Italian fiscal battle, currently being waged between bureaucrats in Rome and Brussels. The tensions and fears cooled in the last 24 hours, following news that the Italian government had agreed to reduce its budget deficit to 2.0 per cent by 2021. The risks here are ongoing, but for the time being the EUR has settled as the spread between Italian government bonds and German Bunds have narrowed.