Bonds and Stocks are diverging – It can’t last

October 21, 2014

It is an interesting time in markets at the moment with the spike in volatility and the bounce in stocks – particularly the S&P 500 futures – off the 2011 trendline.

But while stocks have bounced bonds, although off their lows, are signalling that something remains amiss in global markets. This is xtremely important in judging if the markets are back to their risk-seeking best, are the moves in bond markets.

Indeed, the fact that US 10-year Treasuries are down 2 points to 2.19%, German Bunds closed at 0.81%, and Gilts rallied 5 points down to 2.15%, suggests a disconnect between these two big asset markets.

You really can’t have it both ways. US rates can hardly stay at 2.2% while the S&P 500 is above 1900 unless the Fed delays the end to QE or signals it won’t be changng rates for a very long time. Nonetheless, that could of course happen.

Looking at the markets overnight IBM’s big miss dragged the Dow lower but the index managed to drag itself back into the black by the close of play.  At the close the Dow eked out a 0.12% gain to 16,400 but the Nasdaq (+1.35%) and the S&P were higher. Indeed, the S&P 500 is back above 1,900 at 1,904 with a gain of 17 points of 0.91%.

In Europe, it was a poor day on stock markets with the FTSE down 0.69% to 6,267, the DAX off 0.49% to 8,718 and the CAC in Paris down 1.05% to 3,991. Stocks in Spain and Italy fell just 0.42% and 0.86% respectively.

The wash up locally is that once again the SPI futures are pointing to a stronger open on the ASX this morning. The December SPI 200 futures are 14 points higher to 5,264. With iron ore having another strong night – up $1.28 for the December contract to $81.28 a tonne – the miners will likely take the lead again today.

The SPI hasn’t been able to break back into the uptrend line yet…yet! We’ll see how things play out or if the market turns down from here.

In Asia yesterday, it was a solid day for Japanese stocks even though there were multiple resignations and scandals within the government over election funding. Rather, the hint from PM Abe about a delay to the consumption tax and an asset allocation shift at the government pension fund drove the Nikkei 3.98% higher. Chinese stocks in both Hong Kong and Shanghai were far more subdued, up just 0.2% and 0.68% respectively.

Today is a huge day for the region with the release of the 3rd quarter GDP for China at lunch time today. The market is looking for a fall from 7.5% in Q2 to 7.2% in Q3. Other important data such as industrial production and retail sales is also out at the same time.

On Currency markets, the Aussie dollar looks like it is getting set to break higher and is at 0.8788 this morning. Realistically the RBA minutes at 11.30am and then the Chinese data at 1pm are the short term keys.

But the chart suggests a break of the diamond we highlighted yesterday.

On other markets, the USDJPY rally stalled in the 107.40 region and it is back at 106.88 this morning. Likewise the euro and GBP are stronger at 1.28 and 1.6165 respectively.

On Commodities, besides the rally in iron ore overnight gold gained on the back of the slightly weaker US dollar and it sits at $1,246 this morning. Crude is at $82.90 a barrel but copper slipped under $3 a pound to $2.98. On the Ags, corn was flat, soybeans fell 0.33% and wheat dropped a similar amount, 0.35%.

On the data front today, the market will be wondering what the RBA Board said about the dollar, growth and housing when the minutes are released at 11.30am. Equally however, they will be on tenterhooks awaiting the Chinese GDP data. Tonight, it’s really only existing home sales in the US of any note.

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