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Australian yields plunge supporting the ASX200

US-China trade news and lower bond yields supports a boost in stock indices, Australian yields plunge supporting the ASX200 and focus turns to US CPI data and the European Central Bank as inflation concerns seem to subside.

In shades of the halcyon days of 2019, markets have come alive – or at least have become more lively than what they have been for most of this week – on news of amiability in US-China trade talks and a drop in global bond yields. Stocks are higher across the board in Asia, while our prices are pointing to a positive open tonight for European and US shares (forex markets, it must be said, haven’t received the memo, it would seem, once again trading in very tight ranges despite some meaningful changes in yield-spreads).

The positive US-China news came in the form of reports that commerce ministers from both countries had agreed in principle to continue trade and investment talks, to re-establish stronger economic ties. Though it’s been a while since the US-Sino trade-war has capture market attention or meaningfully moved prices, clearly today’s action shows that at least on the margins, a risk-premium still exists in asset prices because of these trade tensions. Along with the apparent pop in stocks, the Yuan also rallied on the news, as the USD/CNH rolls back in the direction of its primary downtrend.

Perhaps of greater macro-importance was the headline grabbing drop in global bond yields today. Asian trade saw the US Ten-Year yield dip back to price support around 1.47%. More remarkable though was the price action in the Australian ten-year bond yield: it has fallen by roughly ten basis points today, as global inflation and tapering risks seem to be waved-off, even heading into tonight’s major US CPI release.

The many factors really driving bond market action are as various as they are dynamic and nebulous. But nevertheless, lower risk-free rates have on balance been positive for equities today – even if in the longer-run it may signal some burgeoning desire for safety by investors in the bigger picture.

What might be more interesting is how little the forex markets have responded to the changing dynamics in yields. Not every move in bond yields have been the same today, with spreads seeing some meaningful changes. Most relevant was the change in spread between the Australian and US ten-year government bond yield.

It flipped into negative territory for the first time since January and only the third time since pandemic kicked-off. One might assume the Reserve Bank of Australia, which began its QE as a means of squeezing spreads and leaning on the currency might welcome this development. Though the limited moves in the AUD/USD today imply that perhaps the pair isn’t driven that much by interest rate differentials at all.

The drop in yields have been a tail-wind for the ASX200, it can be safely said. The index is up by 0.4% today – and although it’s not touched intraday record highs at time of writing, it looks as though it may finish at a record closing high. The yield sensitive defensive and growth names have topped the intraday market map – though the rally has been fairly broad-based: real estate and IT have been the top performers, followed by utilities and telecommunications.

Turning to tonight’s trade, and we approach the crescendo of the week’s action, it would seem. The European Central Bank meet, and US CPI data for the month is published, with market participants set for a read on inflation in the world’s largest economy and an update on policy settings from the world’s second largest central bank.

Given the move in yields today, and what it suggests about the markets developing attitudes towards inflation and possible monetary policy tightening, the data takes on a slightly greater importance. Though, it must be said, the bar is probably set high to really rattle market participants: the transitory inflation narrative has really been internalized now, while Europe’s (typically) underwhelming fundamentals mean the European Central Bank is unlikely to surprise with some hawkish turn.

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