June 10, 2015

Markets Today: All about the yields

You’d think it was a quiet night overnight: US equities were flat, European stocks a little down and currencies traded in a very tight range.

You’d think it was a quiet night overnight: US equities were flat, European stocks a little down and currencies traded in a very tight range. US yields continued to rise, as did their European counterparts. But digging a little deeper shows that the bond sell-off is broadening through emerging markets and down the credit spectrum.

Measures of bond risk are rising too. They are catching up to the fact that the move in US and German yields might be here to stay; the Fed might just pull the trigger and we enter an environment that hasn’t been seen for quite some time. It isn’t often that it is the bond market that is exhibiting the most concern about risk. This has to do with the long period (post financial crisis) of excess market liquidity, driving down yields and raising issuance in EM. In a world of very low interest rates, there was a search for yield in these markets. They might not have had the high yields of old, but they were better than in the developed markets. In the period of adjustment, back to reflecting more of the actual risks, that could provide some periods of uncertainty ahead. Baby steps for now, just something to keep an eye on.

It was added to overnight, when the ratings agency S&P downgraded Deutsche Bank, RBS and Barclays banks. They did this as they note that the government support, in the event of market crisis, may no longer be there. Governments may no longer be willing to bail them out. That implicit guarantee has been around for awhile now, and (we hope it is not needed) but it would have to be tested to get an idea of how seriously Governments would stick to their guns on this one. But that implicit guarantee, not only on banks but also on other strategically important institutions, States and others has also helped lower risk pricing. Interesting, if markets come to believe it is no longer there.

The data overnight was focuses in the US and very positive, but doesn’t always get much attention. The US JOLTS job opening series was the best since December 2000, and the NFIB small business survey was better than expected. Both series showed better job prospects, but there is also a sign that employers are being “fussy” as to whom they employ (not choosing long term unemployed, for example). That might have the effect of pushing up wages over time. This pushed up yields, but other markets, particularly the FX market was pretty uninterested.

Yesterday, in Australia, the NAB business survey experienced a post budget bounce, with both conditions and confidence rising to +7. Home loans were also better than expected. But the soft Chinese CPI outcome held the AUD back.

Coming Up

Domestically, the key event will be the RBA’s Steven’s speech to the Economic Society of Australia (no topic shown). Domestic consumer confidence is also released; how they have developed after the post-Budget bounce should be monitored.

There is nothing out in the US of interest to markets; in the UK the monthly industrial production release is unusually market moving.

Most interesting might well be the monthly China monetary data. Chinese data has been soft of late and that may weigh on the AUD. At present, we are monitoring the Chinese equity market through the day for the ensuing sentiment effects on domestic markets. The buoying effect of poor China data, thus more PBoC easing, doesn’t seem to be working these days. That might be because the growth follow through of prior easing isn’t coming through. So soft data, is now just that – soft. Aggregate financing is expected to pick up, as is M2 growth and new yuan loans. These are coming from relatively low levels, so the risks are if they slip again.

Your morning note might be a little later than usual tomorrow, as the much awaited RBNZ meeting outcome is released at 7am AEST Thursday morning. Economists are relatively split in the outcome, with 10 in the Bloomberg survey looking for no change and six for an easing. The speculative market remains very short the NZD and rates markets are evenly spread. NAB/BNZ’s economics team is looking for rates to remain unchanged at this meeting, but the forward guidance may show a lower rate profile over time.


On global stock markets, the S&P 500 was +0.00%. Bond markets saw US 10-years +4.88bp to 2.43%. On commodity markets, Brent crude oil +3.14% to $64.66, gold+0.2% to $1,176, iron ore  -0.1% to $64.27. AUD is at 0.7685 and the range was 0.7646 to 0.7723. (For more market prices, please see p.2 of the pdf).

  • US NFIB 98.3A, 96.9P. 97.2E
  • US JOLTS job opening 5.736mA, 5mE
  • Swiss HICP -0.9%A, -0.8P – CHF underperformed

For full analysis, download report:

For further FX, Interest rate and Commodities information visit nab.com.au/nabfinancialmarkets


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