Markets Morning - Rates march higher, the USD catches a bid, stocks mixed

Market Analysis /
Greg McKenna / 24 Jul 2018

Welcome to my daily Markets Musings.

You’ll see things are different from now on. That’s because the full note was approaching 2,000 words some days and I’m breaking it up into a number of reports on the Axi Blog each day now.

That way traders can subscribe to the Axi Blog easily and then cherry pick the yarns and markets of interest 

Feedback always welcome


Market Summary (7.40 am Tuesday July 24)

We learnt again yesterday what an artificial, bubble like, environment we still live in yesterday with rumours of a change in the Bank of Japan’s monetary policy triggering rising rates in Japan and across the globe.

Naturally, the BoJ entered the market to cap the increase in 10 year rates below 0.1% - not a typo. But the surge in JGB rates ignited a run higher in Australian, German, British, and US rates (among others) such that traders once again appear to be fretting about the end of the global monetary experiment that is QE and ultra-low rates.

US 10’s this morning are back up at 2.96%, the 2’s are at 2.63% and the curve is 33 points. So at least the chance of recession has receded. Too sarcastic for this early in the morning? Probably, sorry.

Anyway, while European stocks struggled with falls in London, Paris, Milan, and Frankfurt US markets were able to rally on the back of a little tech move and the financial sector getting a lift from rising rates and a slightly steeper curve.

At the close the S&P 500 is up 0.2% to 2,807 (Google’s earnings beat have futures higher though now). The Dow is down 0.1% and the Nasdaq 100 is 0.25% to the good at 7,368. But a warning folks. If the rumours that President Trump is telling associates the GDP print on Friday for Q2 in the US is going to be 4.8% there is every chance US 10’s are back up through 3% and the stocks market rally runs into a stronger headwind from rates.

US stocks also likely to run into a stronger headwind from the US dollar if we see that sort GDP print. Overnight the market has clearly made the determination that it does not need to take notice of President Trump’s disquiet over the dollar’s strength because the Fed is likely to stay it course and the US economy remains strong.

So this morning the USD selling has abated (despite weaker than expected existing home sales which fell 0.6% in June) and the dollar index is up 0.2% to 94.63, Euro has lost the same amount and is back below 1.17 at 1.1692. USDJPY which reacted so harshly to the BoJ rumours yesterday is at 111.41, roughly flat but well off the low of 110.75. Sterling is down 0.2% at 1.3102.

Of the commodity bloc the Aussie dollar has done worse after being unable to break up and through last week high in the low 0.7440’s. AUDUSD made a higher around 0.7437, but it’s back at 0.7380 this morning for a loss of 0.5% as it’s caught between the Euro and the Yuan which hit 6.80 in USDCNY terms. The Kiwi is 0.35% lower at 0.6782 while the CAD lost just 0.12% with USDCAD at 1.3165.

On commodity markets copper drifted a little in a mixed night for base metals – it fell 0.58% to $2.73 a pound. Gold lost its lustre and is back at $1223. While oil initially rose on the bellicose rhetoric from the Iranian president over the weekend which was matched by President Trump and Secretary of State Pompeo yesterday. But prices reversed as traders recognise the Saudi commitment to man the pumps. WTI fell 0.62% to $67.84 and Brent dropped back to $72.99 for a 0.1% fall off a $74.47 high overnight.

The wash up of all of the above for local stock traders is that after a big fall yesterday on the ASX SPI traders have added back 21 points of the 58 point loss yesterday.

On the day today it’s “flash” PMI day with releases in Japan, across Europe and the US giving a window into the “official” figure which will be released early next month. Other than that it’s the Richmond Fed index in the US as the other semi-interesting datapoint.

Have a great day.

Macro Stuff that affects everyone and everything – either today or eventually


  • Rumours of the BoJ move to change policy away from its QQE program saw 10 year JGB’s spike from around 0.04% to the lofty level of 0.08% sending USDJPY down into the mid 110.70 region and igniting bond selling across the globe. Of course the BoJ wants to announce policy itself so it stuck to QQE and offered to but bonds. But the message here is that global financial markets are fragile if the notion that the BoJ is going to stop anchoring rates at zero drove rates higher.
Source: Twitter Screenshot
Source: Twitter Screenshot
  • Of course the reason it hit US, and other markets, but the US in particular is the notion that if the BoJ lets long end rates rise to help out its banking and life sectors then that will decrease demand for US Treasuries. In a world where the Fed is shrinking its balance sheet that means another source of buying could evaporate and thus put upward pressure on rates.
  • BUT BUT BUT, the whole move last night and the curve steepening back to 32 points is good news if because it signals quiet clearly that it’s not a recession looming over the horizon that is depressing the curve is the foreign reach for yield which is artificially depressing long rates. So as the ECB readies the market for the end to its QE and the BoJ discusses doing the same then the upward drift in US rates from a strong economy and a Fed raising rates is free to find its own level.   
Click on me, I'll expand
Click on me, I'll expand
  • If the US GDP does end up printing as strong as the overnight rumours of 4.8%, if the ECB does continue to signal an end to QE, if the BoJ does signal a shift in policy is on the cards (I know a lot of ifs) then the focus of bond traders will again turn to how high US 10’s might go. The big question for global markets, Emerging ones in particular but also stocks, is what that means for the rest of 2018.
Source: Business Insider
Source: Business Insider
  • Indeed Business Insider quoted BlackRock’s fixed income CIO Rick Reider who said, “We’ve also been quite vocal regarding our concern over the deceleration in the path of growth of global liquidity and think the financial markets are already displaying ample ‘canaries in the coal mine’ that suggest we may be in store for higher volatility, or financial market shocks, which hold the potential to diminish business and consumer confidence”.
  • And folks I haven’t even gotten to trade wars, or the potential conflagration in the Middle East if Iran decides to fight. I’ll leave those for another day.

Have a great day's trading.

Greg McKenna

Chief Market Strategist

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