Bond markets and stocks starting to look top heavy, as China trade disappoints
While most attention was on the rise in UK gilt yields yesterday, and the sharp rises seen since the Bank of England cut rates in August, yields elsewhere also continued to rise with US and German 10 year yields following suit. US 10 year yields hit their highest levels since early June, while the German bund retested its September peaks.
The US dollar continues to firm up in expectation of an upcoming US rate rise by the end of the year, and last nights Fed minutes did nothing to dispel that notion, as the US dollar index hit a seven month high, while oil prices came under pressure on the back of OPEC production numbers and a big API inventory build.
Against this backdrop stock markets are also feeling the strain with US markets unable to arrest their declines of the previous session, finishing more or less flat on the day, while European markets also had a poor session.
Markets in Asia got no comfort either after Chinese trade data for September showed exports slid 10%, much more than expected against a backdrop of weak overseas demand. There was no offset domestically either, as imports also declined 1.9% against an expected modest rise of 0.7%.
It would appear that rising inflation expectations, along with apprehension about the forthcoming earnings season is starting to gnaw away at sentiment, though markets in Europe aren’t being helped by the febrile atmosphere swirling around Europe as a result of the UK’s summer Brexit vote.
The Fed minutes contained little in the way of surprises given the three dissenters it was pretty obvious that the decision was a close call and the minutes reaffirmed that.
The belief beforehand that there may have been other members who harboured some doubts about dissenting, but were holding out a little bit longer, proved to be pretty accurate, as some members expressed concern that the Fed might fall behind the curve, and then have to tighten aggressively to slow any ensuing expansion.
Overall the tone of the minutes was optimism about the direction of the US economy, though business investment, or rather the lack of it remained a worry.
The pound had a slightly more positive day yesterday posting its best one day performance in nearly a month against the US dollar, though it still managed to make the headlines, dropping to a 168 year low on a trade weighted basis, according to Bank of England data.
While rising inflation expectations appear to be driving UK gilt prices lower, the same cannot be said for bond prices elsewhere, where prices are also falling, with the US 10 year breaking below its long term 200 day MA, and the German bund looking as if it might be about to do the same thing.
Could this slide in bond prices mark the beginning of a change in trend for bond investors, in a sign that central banks might be running out of road in their attempts to keep interest rates low?
If that proves to be the case any further fall in bond prices could well pull stock markets down with them.
EURUSD – has fallen through the August lows at 1.1040, and now argues to a move towards the 1.0950 area, and even lower towards 1.0800. Upside resistance remains at the 1.1300 level.
GBPUSD – has found some support at the 1.2100 level in the last couple of days, which needs to hold for retest of the 1.2500 level. A break below the 1.2000 area has the potential to open up the previous flash crash lows at 1.1950, and possibly lower.
EURGBP – currently trading between the 0.9080 level and support at 0.8960 after last week’s dart up to 0.9300 last week. A move back through 0.8960 could well see a move back towards the 0.8780 level with a break arguing for a move back towards the 0.8720 level.
USDJPY – yesterday’s push through the September highs stalled at 104.48 before slipping back, however if we manage to stay above 103.80, we could well head towards 105.80 in the short term. A fall back through 103.80 opens up a return towards the 102.20 area.
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