Caution on bond volatility

Investors are finally waking up and taking heed as the volatility in bond markets continues to ramp up with wide ranges being traded.

Source: Bloomberg

Caution around these bond market moves has been keeping equities on the back foot in the US and Europe. With so many reasons floated for the volatility, investors are uncertain of how this will impact global markets as a whole.

Depressed yields in bonds have been a key driver of the selling in bunds and traders have been seeing them as increasingly unattractive. Bill Gross was quoted as saying bunds are the short of a lifetime around mid-April and, judging by the price action we are seeing at the moment, he wasn’t too far off.

The recent rebound in oil has also been dubbed a potential driver of the bond sell-off due to its implications on inflation. Oil rallied after OPEC raised its demand forecast for 2015 and there was tension near the Saudi border. Whether some of these headlines can translate to a shift in the underlying fundamentals remains to be seen but optimism is certainly growing.  

ASX 200 cheers ‘The Budget’

Chinese equities are experiencing a bit of consolidation ahead of a raft of economic releases later in the day. Data, including April retail sales and industrial production, is expected to pick up moderately and show a positive start to Q2. Japan delivered another solid current account reading with clear evidence the weaker yen is having a positive impact. The surplus widened to its highest since 2008 and this has helped support the Nikkei today.

The post-budget response has been positive for the ASX 200 with analysts deeming the results fairly market friendly. Consumer-related stocks have been the clear winners with good gains for the consumer staples and discretionary sectors. We had seen the market rally into the budget yesterday and there was always the risk we’d be sold off after the fact. However, investors are undeterred and more than happy to capitalise on the recent weakness.

Household goods, electronics and home improvement businesses are drawing some interest as the government hopes to trigger spending through deductions for small businesses. Wesfarmers, Woolworths, Harvey Norman and JB Hi-fi are all among the leaders. Outside of consumer stocks, the energy space has come back to life with the bounce in oil driving sentiment.

A concern going forward will be the AUD, which actually strengthened on the back of the budget. Ratings agencies said the new forecasts don’t threaten the AAA rating and this has seen AUD/USD knock on the $0.8000 barrier.

The implications on the RBA and monetary policy are still unclear to an extent but it seems analysts are satisfied because the government has not necessarily attempted to offset lower receipts by slashing spending. For now, though, it’s anticipated the budget will have limited impact on the RBA.

Europe set to rebound

Ahead of European trade we are calling the major bourses firmer with a raft of releases on the calendar. French and German GDP readings will set the tone while a German 10-year bond auction will also deserve some attention following the recent volatility we’ve been seeing.

One of the factors supporting the euro yesterday was the ECB’s decision to again raise the ELA ceiling to Greek banks to €80 billion. Liquidity is definitely a big issue and unless we see stability in Greece European equities will always be vulnerable to a sell-off. There will be plenty of questions around how much longer the euro can hold on.

In the UK we have BoE Governor Mark Carney speaking along with the inflation report. These events present volatility risk for the sterling and it’ll be interesting to see how much further the currency can run.

April retail sales will be the main release in US trade. Ever since Janet Yellen commented on frothy valuations in equity markets, things have not been the same. The Fed is clearly trying to prepare the market for lift-off and prevent too big an adverse reaction in response.

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