My hypothesis, even though it’s only been one nights trade, is that investors have for some reason decided to undertake a big asset allocation shift across global markets.
Italian bonds were sold last night, US Treasuries rallied, Italian and Spanish stocks were hammered and the Russell 2000 index saw a continued rotation from the recent market leaders.
It all speaks of investors taking risk off the table.
And why wouldn’t they after the moves we have seen so far in these markets in 2014.
Turning to the actual price action and while bond markets don’t get a lot of coverage in this note the big moves, like the one we are seeing in the US at the moment is vitally important to all markets, stocks, Forex and beyond.
Last night the Euro was crashing after weak data and the US Dollar was strong across the board but when 10 year Treasuries slipped below 2.5% all bets were off and the dollar came under heavy selling pressure so much so that Euro moved a full big figure higher higher to the 1.3730 region. Bond God Jeff Grundlach reckons this could be one of the biggest short scrambles of all time – which means rates will fall further and further undermine the US dollar.
The daily chart shows the very long tail on the Euro and the fact that it found support above the 200 day moving average which together with the rally above the previous days highs and the 4 hour charts suggest a rally in the next 24 hours. Only a move above 1.3820 would open the way higher once again though.
In the US stock markets bond rallies are often good for stocks but not last night with the Dow down 167 points or 1% to 16,447, the Nasdaq fell 0.77% to 4,069 and the S&P gave back 18 points or 0.93% to close at 1,871. The data was pretty solid in the US with the NY Manufacturing Index surging to 19 from 5, Philly Fed Index up to 15.4 from 14 but industrial production was a little weaker. Key to the move could be a simply asset allocation shift at some fund managers as they move to safer havens not rusting the rally in stocks or the rotation that is occurring.
In Europe stocks were also lower after EU GDP came in at just 0.2% in Q1 2014, half the rate expected but it was US weakness around the middle of the European day which dragged stocks lower. At the close the FTSE fell 0.55% to 6,841, the DAX fell 1.01% to 9,656 and the CAC was 1.25% loer at 4,445.
As noted above Italian and Spanish stocks were poll axed as investors adjusted their risk profile overnight which fits with my theory we are seeing an Asset Allocation shift. The genesis is in Italian 10 year bonds which were up 0.19% after a stellar rally in 2014 from 4% to 3% before last nights sell off. This meant that stocks in Madrid were sold heavily and the FTSE MIB closed 3.61% lower while in Madrid stocks dropped 2.35%.
– Of course the impact in Australian stocks from all of the above is that on Futures overnight the SPI 200 June contract is down 30 points to 5,494.
Turning to currency markets and it was a huge night. Sterling, like the Euro found support exactly where it was supposed to and the rally will have traders wondering if the US dollar still can’t take a trick. The bulls will have control for the day with the Pound is back at 1.6788.
The story for GBP is clearly the same as it has been for some time – respect this trend line unless or until it breaks.
USDJPY sits at 101.55 while the Aussie is mid range at 0.9355.
On commodities Nymex crude fell 0.79% to $101.56 Bbl, Gold dropped $12.20 oz back below $1,300 sitting at $1,296.60 this morning. Copper is at $3.16 lb while silver dropped 1.46% to $19.47 oz. On the Ags the selling continues with corn down 2.27%, wheat off 1.77% and soybeans down 1.29%.
On the data front today the Asian data mentioned above dominates but the EU trade balance will be interesting particularly for Euro traders. In the US tonight we get building permits, housing starts and the Uni of Michigan consumer sentiment survey.