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Bond prices under pressure ahead of US GDP

market falling stocks lower bear market

market falling stocks lower bear market

Oil prices have continued their see-saw price action this week as traders weigh up whether OPEC and non OPEC members will be able to implement the deal thrashed out in Algiers at the end of September.

Prices had been on the decline after Iraq became the latest country to argue it should be exempted from the freeze given its fight with IS in the north of the country. Yesterday’s rebound appears to have been predicated on reports that Saudi Arabia, along with some others might be willing to cut its output by up to 4%.

This rebound in prices helped pull equity markets off their lowest levels of the day as they continued to chop around within their recent ranges, as investors continued to weigh up where the next significant move was likely to come from.

The US dollar has continued to gain strength in anticipation of a hike in rates at the end of this year, while recent economic data out of Germany and the UK has raised the prospect that further central bank action may not be that imminent with respect to additional policy easing measures, from the ECB and Bank of England. 

This appears to be behind a sharp slide in government bond prices yesterday which pushed 10 year yields to their highest levels in several months. UK 10 year gilt yields, pushed up to 1.25% their highest levels since they fell from 1.37% the closing level on the 23rd June, after UK Q3 GDP came in at 0.5%, exceeding market expectations of 0.3%. This economic resilience makes it much less likely that the Bank of England will signal further easing next week at the same time as it publishes its latest quarterly inflation report.

German bunds also got caught up in the selloff, with yields hitting their highest levels since May, given the resilience of this week’s German economic data, along with the prospect that inflationary pressures may be starting to build in the broader global economy.  This could well be borne out by today’s German and Spanish CPI data, even if Japan is struggling to create any inflation of note after its CPI inflation numbers came in at -0.5% this morning.

Recent inflation data from the US, UK , Europe and China has seen prices push to their highest levels in two years, and it would appear that bond prices and yields are readjusting to this, which could well be good news for the banks in the coming months, which would be particularly welcome if UBS’s results this morning are any guide. The Swiss bank reported this morning that its Q3 profits dropped 60% from a year ago, with higher regulatory costs being cited as one reason for the decline.

The sell off being seen in bond markets also appears to be weighing on risk appetite with US markets closing lower for the third day in succession yesterday, and this looks likely to weigh on today’s European open

The main focus today is likely to be on the first iteration of US Q3 GDP, which is expected to show a jump to 2.4% from 1.4% in Q2. An improvement in Q3 would be most welcome given that it would break a run of 5 consecutive quarters of slower GDP growth.

A number significantly lower than what is being expected, below 2%, could well take some of the heat out of the recent US dollar rebound, though I’m not sure it will alter the probability that the Fed will look to act on rates in December. Next week’s Fed meeting is more than likely to be a do-over given the proximity of the US Presidential election 6 days later, with the Fed remaining on the sidelines, despite the three September dissenters.

EURUSD – the pressure remains on the downside while below the 1.0950/70 level, with the prospect of a move towards trend line support at 1.0710 from the all-time lows at 0.8230 back in the year 2000. We need to push back above 1.0970 to stabilise and argue for a retest of the 1.1100 area.

GBPUSD – yesterday’s failure at the 1.2270 area has seen the pound slip back, undermining the prospect of further gains. As long as we stay above the 1.2080 level we can still head higher towards 1.2330. 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 – it feels like we could well head back through the 0.8980 level towards the 0.9080 level, and the highs last week. While below the 0.9000 level the risk remains for a move back towards the 0.8870 level.

USDJPY – having seen the US dollar push through the 105.00 area we could well head towards the 106.70 area and the 200 day MA, and July highs. The 104.20 area should now act as support on any dips.

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