Bonds and the US dollar react to weak GDP but stocks rally on regardless

June 26, 2014

Traders time to get wary if last night’s price action is any guide because the moves in bonds across the globe and stocks look incompatible to me. Indeed the US dollar weakening, even slightly, suggests that Macro traders are seeing risks even if stocks want to keep on keeping on.

The big, nay huge, news was the revision to US first quarter GDP .

The original 0.1% growth rate had already been revised to -1% on the second read but last night’s third read showed a monstrous 2.9% contraction. That’s the worst outcome since 2009 but somewhat rubbery given the big revision to healthcare services from +9.1% to -1.4% which meant it went from adding 1% to GDP to subtracting 0.16%.

In the end though US stocks rallied regardless as the market shrugged off the weakness. That seems reasonable given this is a hindsight number and doesn’t seem to fit with the more recent data.

But as we noted above bonds didn’t ignore the data with the weak GDP accompanied by a surprise 1% fall in durable goods which helped the US 10′s rallied down to 2.56% which help some serious rallies in European bond markets. German 10 year Bunds rallied 6 basis points to 1.26% for a stunning 4.76% one day capital gain. Italian 10′s fell 2 points to 2.74%, Spanish 10′s finished at 2.64% while in the UK 10 year Gilts fell 9 points to 2.65% for a big 3.16% capital gain.

Imagine the excitement if stocks were up that much on any given day.

But at the close the Dow rose 50 points to 16,868 for a gain of 0.3%, the Nasdaq rose 0.68% and the S&P 500 was up 10 points 1,960 for a 0.51% gain.

We can ignore Europes falls because they are essentially a day behind but it was a sea of red with the FTSE down 0.78% to 6,734. The DAX was 0.71% lower at 9,868 and the CAC fell 1.27% to 4,461. In Spain stocks dropped 1.25% while Milanese stocks are down 0.8%.

Locally the recovery in the US market helped the SPI 200 futures contract gain 8 points on the September contract to 5361. No doubt iron ores continued recovery won’t hurt prospects for an even better day on the physical market when it opens this morning.

On currency markets the US dollar was hit by the weakness in the data which has pushed the Aussie dollar back above 94 cents at 0.9403. Euro is up at 1.3629 and Sterling is at 1.6979. USDJPY sits at 101.84 this morning.

I cut my Aussie and Euro short along with my S&P 500 short yesterday afternoon Australian time as I thought that the market looked set for a bit of a rally – technically based.

Still in the box

On commodity markets the big news for Australia is the continuation of iron ores recovery from last week’s lows below $90 tonne. At $95.13, up $1.38 overnight, iron ore is now up 7.29% from the low. Newcastle coal for September delivery also rose, up 35 cents a tonne to $70.70.

June Nymex crude was up 0.73% to $106.08, gold is braking out of a huge downtrend at $1,321.80 this morning and silver sits at $20.86. Copper gained another cent to $3.16 and even wheat rose up 0.79% although corn dropped back 0.45% and soybeans were largely unchanged.

On the data front today it is another quiet day in Asia before we hear from BoE Governor Mark Carney tonight and also receive the BoE’s financial stability report. In the US tonight we see jobless claims, personal income and consumption data along with the Kansas Fed manufacturing index.

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