The overnight trading session was divided into two distinct parts. European trading saw ongoing support for stocks, and the continuation of the corrective, curve-flattening rally in bonds. However, sentiment swung sharply in the American session after US weekly jobless claims jumped to their highest level since August. Stocks snapped their winning run and bond selling resumed.
One week’s jobless claims rarely have such an impact. The market sensitivity reflects how much short term moves are currently determined by shifts in thinking about the relationship between fiscal and monetary policy. The worsening US employment numbers increases pressure on the incoming administration to deliver a larger fiscal stimulus package sooner. This is good news for growth, but implies that central banks will start reducing monetary support sooner.
The recent sell off in bonds looks like a structural shift in interest rate markets, possibly indicating that the cycle has turned and that the next moves for interest rates will be up, not down. In the past, share markets have rallied as the stronger growth that drives rates higher lifts company profits. The issue for equity investors is that many markets are facing this turn while trading near all-time highs.
Asia Pacific traders are looking at an uncertain day. A softer US dollar improves the outlook for regional currencies, and potentially other assets. Stock futures are mixed, and indicate small opening gains in Japan, Singapore and Hong Kong, and a small drop in Australia.