May 27, 2015

Markets Today: Many Lightbulbs

Seemingly there were many “light bulb” moments overnight, when competing ideas, that have been around awhile, suddenly gain traction and markets run with them.

Seemingly there were many “light bulb” moments overnight, when competing ideas, that have been around awhile, suddenly gain traction and markets run with them. It has produced some inconsistent moves but in isolation they have been explained away.

The most consistent and largest move is the stronger USD and that has been an overriding force. Market volatility has shot higher, with equities lower; based on Greece concerns and stronger US data. Bond yields are lower, based on Greece. Commodities aren’t sure how to take the prospect of rate hikes and are lower. And JPY is an underperformer, seemingly on the (already known) prospect of a weak CPI later this week and possibly more BoJ QE.

There wasn’t much new news on the Greece concerns, some were also positive- Greece could combine all their June payments together if the IMF agrees, which gets them another two weeks for agreement with the IMF. But periphery bond yields are higher, and Bund yields are lower – a sign of bunkering down and risk aversion.

The USD is stronger, also a good sign of risk aversion, but also of the stronger US data. Finally! They weren’t extraordinary but good enough for a return to considering higher US interest rates this year. Durable goods orders, house prices, consumer confidence were all better than expected and there were some decent upward revisions to prior data. That might explain the stronger USD, and perhaps the fright taken by equities, but not the big drop in yields.

The JPY was the underperformer, with USD/JPY rising above 123 for the first time since 2007. That would be consistent with stronger US growth but not with the risk aversion or yield compression also about last night. The IMF noted (over a day ago) that growth needed to pick up and the BoJ might have to do more QE. We also suspect CPI to underwhelm but that is not until Friday and the Tokyo measure has already been out for April and it wasn’t encouraging.

This information combines to suggest that there was some positioning adjustment going on. JPY should be weaker, equities are going to adjust if US growth is strong enough for a hike but not too strong to support even better earnings. While there have been big moves higher in yields over the last month; so nervousness about Greece is a good trigger for adjustment. With the competing forces, it could be a little trickier for a consistent theme in markets until one of the factors is definitive enough to override the rest. Let’s hope it is a stronger US economy, rather than a Greece default.

Coming Up

It is yet another quiet data day, with attention moved to Greece, for want of anything else to watch. Markets abhor a vacuum and with the attention span of gnats, the next big thing (even if it’s been around for awhile) grabs the headlines. That leaves the USD bid and markets thinking about positioning for the low probability outcome.

Domestically, Australia gets the first of the GDP inputs, with construction work done. That is expected to be soft, so pushing down on Q1 GDP but the forward indicators are a little more positive for construction. The RBA’s Lowe is speaking but as interesting as regulation is, it doesn’t tend to move markets.

Offshore it is quiet as well; Germany’s retail sales have disappointed but European markets are otherwise occupied. China’s industrial profits might scrape together some interest, but it isn’t usually a focus at present.

The Bank of Canada rate decision is not expected to result in a change in rates. Their commentary might be interesting, in the context of the sell-off in CAD and pick-up in oil prices. The RBA would like to be so lucky.


On global stock markets, the S&P 500 was -1.10%. Bond markets saw US 10-years -7.72bp to 2.13%. On commodity markets, Brent crude oil -2.59% to $63.82, gold-1.3% to $1,188, iron ore +2.6% to $62.78. AUD is at 0.7737 and the range was 0.7727 to 0.784. (For more market prices, please see p.2 of the pdf).

  • US Durable goods nondefence ex aircraft +1%A, +0.3E, 0.6P revised up from -0.5
  • C/S house prices 0.95%y, 0.9E, 1.21P rev from 0.93
  • US consumer confidence 95.4A, 95E, 94.3P from 95.2
  • US new home sales 6.8%A, 5.6E, -10P from -11.4

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