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Volatile times -Risk On

It’s a day for market clichés. “Sell the rumour; buy the fact “and “risk on” seem equally applicable.

Stock markets did the unexpected last night, rallying strongly despite higher than expected inflation and rising bond yields. Buyers have been waiting in the wings. When market strength began to emerge despite news of higher inflation, it seems they acted, forcing short coverers to respond. All this is typical behaviour for the initial bounces following a volatile sell-off.

These dynamics combined with risk on moves in metal and oil markets have delivered a strong opening for the ASX 200 this morning.

US CPI data is benefitting from the weaker $US, with goods deflation moderating. Although retail sales were weaker than expected, this is mainly about mean reversion following a strong boost to sales after last year’s hurricanes. The overall trend in US consumption remains solid and should underpin growth. This combination of decent underlying growth and gradually improving inflation should see the Fed increase its rate at least 3 times this year.

US Bonds were one market that did act as anticipated in response to the CPI data, with yields continuing to inch higher. Rising bond yields may prove a headwind for the current bounce in equity markets before too long. Volatility could be here for a while yet.

The US Dollar fell heavily despite the inflation data and the likelihood of higher interest rates. Markets appear more focussed on rising US deficits.

Telstra’s profit is down from the same period last year but the result may be better than some had feared. The ongoing productivity program is helping to stem the impact of the revenue squeeze from the NBN and rising competition. The result has been good enough to avoid a re-test of the October/November lows at this stage.  

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