Bonds Are Getting Hammered Again - That's A Risk For Markets

Originally published by AxiTrader

Quick Recap

Bonds have quietly snuck back onto traders radar with some big moves overnight. UK 10 year rates rose 12 points, German rates doubled (low base) and US rates hit the highest level in months. If this sell off continues then stocks traders will have questions to answer about valuations and we could see sell offs in both asset classes if US 10's break 2%.

The US dollar was a big mover overnight as well hitting a new 7 month high driving USD/JPY back above 105 and the AUD/USD below 76.

But stocks in the US were only marginally lower.

What You Need To Know

International

• An earthquake went off in the bond market overnight with rates rising sharply at the long end of the curve. Already yesterday in our timezone the US 10’s were sitting just below 1.81%. But overnight they are up another 5 points to 1.86% as bonds in the big markets surged lead by the selloff in UK and German rates.

• UK Q3 GDP which was better than expected with a print of 0.5% which saw year on year growth accelerate to 2.3% and that is being blamed for the sell off in bonds.

• But as I highlighted US rates were already back at multi-month highs in our time zone yesterday and if you read this note daily you’ll know there has been a theme I been recording of reflation for the economy. It’s not just that Brexit doesn’t appear to have damaged the UK economy anywhere near as much as many said – something I talked about here from the very start – but rather there is a pulse of growth and inflation which is moving through the global economy. The UK data last night simply added to better data we’ve seen from Germany, even France, and the CPI and PPI trends in data released over the past few weeks.

• Speaking of data and events though – there was plenty last night. The highlights are:
  • Sweden’s consumer confidence easily beat expectations but the Riksbank interest rate decision – which left rates at -0.5%, was accompanied by a pretty solid promise for more cuts. The USD/SEK rate surged as a result.
  • US durable goods orders fell 0.1%, exp -0.1%, but stripping out defence they rose 0.7% and taking out transport left a 0.2% print.
  • Jobless claims dipped 3k to 258k while Pending home sales rose 1.5% while the Kansas City Fed manufacting index rose to 18 from 15 previously
  • In Europe, CETA got the go ahead after Belgium signed on.

• Also in Europe ECB governing council member Mersch said the bank’s ultra-loose policy can loose effectiveness over time. Yup no argument there. But his colleague Ewald Nowotny reiterated that December is the time for the decision to extend and what to buy. “There will be two decisions ... One of course is to prolong, to what extent, for what duration. The other one is of course to weigh up. This means we have to buy further assets and the question is what assets, do we have enough assets to buy and this is a point of discussion” he said.

• President Xi Jinping has been handed the title of “core leader” which strengthens his leadership and puts him on par with Chairman Mao and Deng Zhao Ping and cements his grip on power in China. For traders and markets it also cements the path the Chinese economy is on both with reform and growth.

Australia

• More carnage on the S&P/ASX 200 yesterday with stocks falling 1.2% to follow the previous days 1.5% drop in broad based selling. Again a myriad of minor catalysts seemed to coalesce in a bearish outcome for the market as a whole to leave the ASX200 down 64 points at 5295.

• That the ASX has underperformed the bigger markets of the globe over the past few session is obvious. Why it has collapsed so swiftly and sharply is difficult to fathom. From a macro perspective it’s as if there was a portfolio liquidation from or by someone which gave the day traders a chance to sell everything.

• One thing we have seen in 2016 is when the ASX does collapse like this – and this is the 3rd or 4th time this year the market has completely diverged from the S&P 500 – it usually bounces back. Here’s the latest update of that relationship.

• Maybe that’s why SPI traders have been buying with such gusto overnight and have lifted the December SPI 200 contract 28 points, 0.5% overnight (it was +40 earlier this morning though). It’s as if someone bought a portfolio.

• The Australian dollar remains under pressure but data from the ABS yesterday shows another lift in Australia’s terms of trade. Import prices fell 1% while export prices surged 3.5% in the third quarter which will boost national income.

Forex

• Notions that the US dollar might have topped have proved incorrect with the US Dollar Index climbing to a new 7-month high overnight. Euro is off its highs, and also off its lows to be roughly unchanged but the Yen is off 0.8%, the Aussie is down 0.8% as well, and the British pound – even with that solid data – is 0.6% lower.

• It’s the Yen, USD/JPY, where the best action is at the moment. Prices stalled below the 104.70 region for a week or two but have now decisively pushed up and through and the technical target of 107.85/108.10 I have been discussing for some time now is in the frame. The daily could be getting a little stretched but my weekly system/strategy is very bullish for a move above 110.

• Looking at other Asian currencies: A Reuters survey of 21 fund manager conducted this week reported this morning that Yuan shorts “rose to the largest since early January”. Shorts in the Sing dollar are at their highest since October last year while the Korean Won shorts are at the highest level since May. But bearish positions in the Thai baht and Philippine peso have been pared.

• The Australian dollar is still feeling the after effects of its continued failure at 77cents. That naturally puts in traders mind a tendancy to push prices toward levels where real support might lie so the Aussie is back below 76 cents at 0.7583 this morning and looking pressured.

• USD/SEK is at a 6 and a half year high at 9.067 this morning.

Commodities

• Crude Oil is up 1% in both WTI and Brent Oil terms overnight.

• Last night’s release of Oklahoma cushing inventories, which fell 553,000, helped lift prices a little. But the question of why inventories are important one day but not the previous or next shows this is still a very nervous market.

• The daily tooing and froing of prices as competing thoughts and comments about next month’s OPEC meeting really serve to highlight the level of confusion in the market. Certainly I believe that some sort of deal will be done. But it is becoming increasingly clear that the heavy lifting for such a deal is going to fall to the Saudis and some of their near neighbours.

• One of the more remarkable moves overnight is the rally in Gold. Small though it is gold’s move back to $1270 even though bonds are selling off and the US dollar is interesting and something to watch. I like gold medium term.

• Copper was up again and is at $2.1565 this morning.

Today's key data and events (all times AEDT)

• Australia - HIA New Home Sales (MoM) (Oct) (12pm); Producer Price Index (QoQ) (Q3), Producer Price Index (YoY) (Q3) (12.30pm)
• New Zealand - ANZ Business Confidence (Oct) (11am)
• China - Nil
• Japan - Tokyo Consumer Price Index (YoY) (Oct), Tokyo CPI ex Fresh Food (YoY) (Oct), Tokyo CPI ex Food, Energy (YoY) (Oct), National CPI Ex-Fresh Food (YoY) (Sep), National Consumer Price Index (YoY) (Sep), National CPI Ex Food, Energy (YoY) (Sep), Jobs/applicants ratio (Sep), Unemployment Rate (Sep), Overall Household Spending (YoY) (Sep) (10.30am)
• Germany - Consumer Price Index (YoY) (Oct), Consumer Price Index (MoM) (Oct), Harmonised Index of Consumer Prices (YoY) (Oct), Harmonised Index of Consumer Prices (MoM) (Oct) (11pm)
• EU - Consumer Confidence (Oct), Services Sentiment (Oct), Industrial Confidence (Oct), Business Climate (Oct), Economic Sentiment Indicator (Oct) (8pm)
• UK - Nil
• Canada - Nil
• US - Gross Domestic Product Annualized (Q3), Gross Domestic Product Price Index (Q3), Employment cost index (Q3), Personal Consumption Expenditures Prices (QoQ) (Q3), Core Personal Consumption Expenditures (QoQ) (Q3) (11.30pm); Reuters/Michigan Consumer Sentiment Index (Oct) (12.55am); Baker Hughes US Oil Rig Count (4am); CFTC Gold NC net positions, CFTC USD NC net positions, CFTC Oil NC net positions (6.30am)

Have a great day's trading