Markets rally as global concerns abate

Concerns around the three C’s (cold, Crimea, China) are dropping off as the effect of the US winter subsides, the Crimean conflict is no longer affecting markets and China has seen stimulation bets ramping up.

The three C’s have been the largest contributing fact to the breakdown in gold, particularly the US recovery story post the winter months over the last two weeks; they are now turning the tide positively on the markets.

Markets rallied solidly on news that US consumer confidence hit a six-year high. Since Janet Yellen’s testimony last Wednesday, the S&P has added 15 points (0.8%) and the DOW as rallied 223 points (1.4%). Disregarding her slip in the Q and A session, her assertions that the US economy will filter out the effect of the harsh winter look spot on. East coast manufacturing is increasing and jobless claims are at a four-month low which gives upside risk for the non-farm payrolls and increases the possibility that the unemployment rate could fall to 6.5%.

This has excited the markets, however the more supportive the data, the faster the FOMC’s outlook will be reached. This will increase the bets of rate hikes in the world’s largest economy in the medium term.

Although no major moves have been seen in the ten-year treasuries, two-year and five-year treasuries have seen moves. The medium-term outlook is appealing for yield hunters as bonds rate improve over the coming year (and unwinding events for equity yield plays). This is only going to accelerate as the prospect of increases to the Fed funds rate gains momentum. Consumer confidence is a clear leading indicator for employment and inflation.

The other dictator of markets currently is China; the movements in the commodity markets over the past 48 hours have been very interesting. Reports are emerging that the National Development and Reform Committee (NDRC) has approved five new railway projects, and there are rumours the NDRC is looking to add to these, particularly in urban areas. Credit Suisse suggests the fact it is the NDRC announcing these development having not been given approval for any in the previous three months means China is pushing the button on stimulus.

Credit Suisse believes that cost for these projects is likely to be around RMB142 billion, which may explain the changes seen over the commodities space. Copper saw a bullish break, jumping 2% in London and New York as the prospect of the world’s largest consumer of the industrial metal drove traders back.

Iron ore has also reached a 10-day trading high after an extraordinary day on the futures yesterday. Both iron ore and rebar futures have settled down today, but both are higher still. The more we hear about ‘increasing domestic demand’ and the acceleration of infrastructure projects like the rail projects, we will see copper and iron ore moving higher still.

The other likely action from China as it tries to quell slowdown fears is the PBoC may relax its crackdown on lending. Today for the first time in a week the PBoC has lowered the fixing rate to CNY6.1440 from CNY6.1426 yesterday. The talk from the floors in China is that the PBoC is canvasing the appetite for seven- and 14-day repo raising. Considering the volatility in the rates in June last year, particularly in the seven-day repo if it is well bid it will show that corporate demand is still supportive and that funding will continue. This again is short term positive.

This will mean markets will continue to push higher in the short term, with the US and China currently driving most market reactions; and signs of stability or growth will be equity and commodity supportive. The question will then move to whether it is sustainable in the long-term or a short-term jab. 

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