Bond yields are now within touching distance of 3% and emerging markets are seeing mass exodus of foreign funds.
As we have mentioned before, it’s the moves in the bond market that are driving market sexpectations. Since tapering was ‘officially’ mentioned at the June meeting, rates have increased 34%, approximately 80 basis points since mid-June, and over 150 basis points since it was first mentioned.
Last night 10-year treasury yields reached 2.88%; a level not seen since May 2010. On current momentum, 3% could be achieved in the next two weeks and some people in the bond market see 3% to 3.25% as fair value now for US treasuries, post-taper.
This makes the next few days very interesting, with the July FOMC minutes being released tomorrow night and the Jackson Hole symposium beginning on Friday. The volatility these two events could cause to markets could see bond yields over shooting fair value, and equity markets logging five and six day losing streaks. If there is any sign of tapering from either the minutes or Jackson Hole we would expect USD and US bond yields to rise.
There is no reason for treasury yields to be this high; inflation is near zero, official rates are not expected to be changed til 2015 and the underlying credit market is still shaky from uneven economic data. We would expect value players to come running if the 3% yield mark is achieved. The question is if value investors can slow the sell-out of bonds enough to stop the possible overshoot that now looks like being achieved.
The whole US bond play is weighing on global markets, particularly emerging markets. India and Indonesia are currently experiencing mass exodus from their money and equity markets. The Indian rupee has fallen to an all-time low versus the dollar, at 63.23, and the Sensex index continues to slide as foreign investors shed over US$3 billion in stocks and bonds in July alone. The Jakarta composite is fairing even worse; falling 5.6% yesterday with the rupiah falling to 10,608; its lowest level since 2009 as the country’s current account deficit hit a record width.
As major trading partners with Australia, particularly in commodities, this is slightly concerning as currency headwinds slow consumption. Although we have major ties to China, the trade with Indonesia and India are key parts of the Asian story for Australia. Agribusiness, energy and material plays will be monitoring this very closely as FX headwinds have been a drag on local business for over a year now, and not just to the US and Europe.
Moving to the local open and today is probably the biggest day on the earnings calendar. The release of BHP’s full year profits this afternoon will be one of the largest drivers of the ASX in the coming days. The release is scheduled for 15:30 AEST which will only give the ASX 30 minutes of regular trading plus the 10 minutes of post-match close to dissect the results.
The press conference by CEO Andrew Mackenzie is after market close, at approximately 17:30 AEST. The biggest response therefore to the BHP result will come from the SPI futures and the London listing as he provides more details of BHP’s strategy. There is a real possibility of a ‘sell the fact’ trade, with BHP having rallied 21% since its low in June. The key will be capex guidance.
BHP’s ADR is suggesting the stock will drop on the open, down 29 cents to $36.75 (-0.79%). The ASX is currently a point lower, down 21 points to 5092 as the local market awaits the RBA minutes from the meeting on 6 August. The expectations are for fairly neutral views and this see the swap market only pricing in a 50% chance of a further rate cut by year’s end, with the most likely date for the cut being Melbourne Cup. AUD should test the 92 cent handle again.