I only see it as a negative that St Louis Fed president James Bullard would advise the central bank to consider delaying its asset purchase program, with inflation expectations clearly needing to be supported. Perhaps the so-called bond vigilantes are at work here, pushing down inflation expectations through the bond market, with the idea that the Fed will continue pumping liquidity through the system.
If Mr Bullard’s warning does come to fruition, it’s unclear at this stage whether it would maintain the current purchase rate of $15 billion a month in US treasuries and mortgage-backed securities, or whether it would increase this to a larger amount. However, Mr Bullard’s comments are important as it’s not often we get someone who up until recently was calling for a hike in fed funds rate in Q1 to change tact and fall on the dovish side of the ledger.
It seems that the threat of continued QE has satisfied a market so intently drawn to liquidity, and if you look at price action in Dow Transports, Russell 2000 and the Philli Semiconductor index, we’ve seen a really nice snapback over the last couple of days. If these markets are the canary in the coal mine, then we can feel some assurance that the pace of decline in the S&P 500 could be coming to an end.
Gold is a natural barometer on expectations around liquidity, although the lowflation that is seen in most economies would be holding the buyers back. Spot gold is at a critical juncture, with price finding supply around the June 3 lows of $1240. We’ve seen the August downtrend give way, although I feel sellers will be prevalent around $1253 (the 50% retracement of the August downtrend) and it seems Aussie traders would much rather own the commodity than the companies that mine it.
Bullish price action in crude
Both Brent and West Texas Intermediary (WTI) printed bullish outside day reversal patterns at trend lows yesterday, with price seeing good follow-through buying today. It seems we may have seen a short-term low in energy prices, which will no doubt please the ECB and the Fed who will want to see inflation expectations stabilise. In Australia we’ve seen reasonable buying of energy names over the last two days, but it’s hardly been euphoric.
Certainly the moves today in Asia pale in comparison to what we saw yesterday, especially in Australia where investors piled into equities in spades, recording the ninth biggest volumes day of the year. Volumes today are still above the ten-day average, but after the early morning buying spree traders have sat on their hands, no doubt exhausted after trying to navigate the volatility and what could be the catalyst for the trend reverse.
China has seen strong selling too with the Shanghai Composite down over 1%, with concerns around the timetable on the Hong Kong/ China ‘Connect’.
The macro issues haven’t gone away by any means and after all the techincal damage to these markets, it’s hard to be outright bullish. It has to be said that one of the big themes of late has been a strong position adjustment from many over-owned asset classes; notably the USD. A number of traders would have also been selling profitable positions (such as the USD) to look after damage done to other loss making positions, notably in the equity market. Europe has not improved, so it will be interesting to watch five-year inflation expectations (through the swaps market) and whether we see a slight pick-up here. European bond markets are fascinating right now and while German bond yields have been attracting buyers (the ten-year bund has fallen from 1.11% to 0.82% since mid-September), at the same time we’ve seen Italian, Spanish, Portugal and Greek yields rising. This is a new development and it seems European bond markets are acting like credit markets, with traders focused on spreads against German bunds.
European bond markets in focus again
Spanish yields rose with gusto yesterday, with a poorly bid bond auction in play, which also had strong ramifications on EUR/USD. Greek bond yields are also back firmly in the centre of the markets’ spot light and yesterday’s monster sell-off (the ten-year jumped 111 basis points to 8.9%) was the biggest since late 2011. The bond market looks like it has pushed Greece out (once again) of the funding markets and this is will encourage further liquidations of European markets from US funds, which according to Lipper was a record $1.3 billion this week.
US futures have pushed higher today, although seem to be finding better selling as the European open approached. It is the turn of Janet Yellen to speak today (23:30 AEST) and there is the prospect that she will keep the supportive narrative going despite the speech focusing on inequality issues.
We also get US September housing starts and building permits, with both data points expected to improve month-on-month. On the earnings side, traders will be keeping an eye on numbers from Morgan Stanley and General Electric (GE) in play. GE is expected to earn 37 cents, on revenue of $36.92 billion and it’s worth remembering that GE has such a strong pedigree around earnings, having beat or matched earnings consensus every quarter since Q1 2008 (source Bloomberg).