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The question of where bond yields should be is one of the most frequently asked around; while a move above 3% in the US ten-year bond is now a real possibility in the short term, with inflation expectations so low and growth in Q3 likely to print 2.5% to 2.7%, is a move above 3% justified, especially with ‘tapering’ now fully in the price? There is clearly more factors at play right now than just ‘tapering’ though, which is causing this sharp liquidation in the sovereign bond market. Perhaps it’s a view that Larry Summers is the not only going to get the Fed chairman job, but could become more of an authoritarian at the top. One of the key differentials between Ben Bernanke and Alan Greenspan was the clear transparency that Ben Bernanke brought to the Fed, with everyone, including non-voters, having a chance to express their view. We would expect this to continue with Larry Summer potentially at the helm; however there seems to be a view that he will be more hard-lined. Bundesbank head Oliver Weidman also seemed to authenticate the markets’ view that rates will go up before (and despite) the projected current forward guidance yesterday; however it’s the flows that have us most interested; when buyers of US treasuries come in, the sellers simply smack prices back down. This simply doesn’t look like a market that is going to see lower yields, at least without some serious verbal intervention from the Fed.
The S&P 500 is looking heavy as a result, with a close below 1652 (the 38.2% retracement of the 1560 to 1709 move) and break of the medium-term 55-day average at 1654. This upcoming session will be key to see if the bulls support given the index has already fallen four days in a row (dropping 2.9% in the process) and the S&P hasn’t seen five down days since May 2012 or 66 weeks ago. A move to 1617 (61.8% of the mentioned move) could be on the cards, although the 100-day moving average at 1632 could support prior to that and a move to 1617 would represent a 5.4% fall from the recent highs.
Perhaps the moves in emerging markets (EM) need to be even more closely observed; while we don’t see another 1997 Asian crisis, we still need to monitor events. Countries that have reasonable levels on inflation, run large current account deficits and continue to face worrying capital flow prospects are getting absolutely destroyed and remain vulnerable. Recall during the Fed’s easing cycle nearly $4 trillion made its way into emerging markets due to the search for the high yield on offer; this is being unwound at a rate of knots due to the steepening of the developed markets’ yield curve and expectations around a near-term lowering of liquidity operations. The biggest moves today have been in USD/IDR, USD/INR and USD/BRL (Brazilian real), with USD/BRL hitting the highest level since March 2009, helped largely by the finance minister who re-iterated that the BRL FX rate is ‘flexible’ and thus not showing too much concern about the falls. The same levels of concern can’t be said about India and Indonesia, where both equity markets and currencies are under further pressure, with the IDR (Indonesian rupiah) losing another 1.3% against the USD, and the market still reeling after yesterday’s record trade deficit. We’ve also seen a nine basis point move higher in the Indian ten-year bond to 9.33%. Over the last month the INR has lost 6.9% against the greenback, while the BRL has dropped 6.9% and IDR 5.48%.
While the moves in EM have commended macro traders’ first port of call, flows into the [currencies:NZD/USD|NZD] have been of interest as well today. The NZD has fallen 1% again the greenback, hitting a low of 0.7979. The RBNZ governor has clearly spooked the market, with calls that the Kiwi is ‘overvalued’ and while rates may go up in 2014, that change is not warranted just yet. Perhaps the bigger issue though was the macro-prudential measures put in place to cool the overheated housing market. New restrictions will include limiting loans of more than 80% of the property value to 10% of new lending, which to be fair is around about the same levels that the market had been calling for, however the timing seems sooner and given the current level of 33% is a strong change. Is this something the RBA could adopt in the future?
In Australia the focus has been on earnings, with reports coming in from all sectors and keeping analysts busy. The market unwound near its low, but has found some buying into the afternoon, although we await BHP’s earnings, which could throw the market around given its 8.4% weight on the index. On the currency side, AUD/USD has been generally offered today, hitting a low of 0.9067 and is eyeing the 90 handle again.
Yesterday’s failure to close above the 55-day moving average at 0.9216 and 76.4% of the 0.9319 to 0.8848 move suggested the bulls have really lacked the emphasis to push the pair higher and the liquidation in emerging market assets won’t help either, given the AUD also was a key beneficiary of QE-induced cheap money flows. Today’s RBA minutes haven’t changed anyone’s view on when the central bank will move again, with it effectively offsetting a view that a rate cut was not imminent, suggesting the possibility of easing in the future was not ‘closed off’.
Japan is lower by 1.3%, while the Hang Seng is down by 1.5% and certainly this is subtracting from sentiment with European calls suggesting a weaker open. It’s all about earnings today, with mining names in play in London with BHP and Glencore Xstrata, while in the US retailors will be in play with Home Depot, JC Penney and Best buy due to report.