The gap between bond and stock reality grows will Forex traders notice?

August 18, 2014

German 10’s fell below 1%, US treasuries made fresh one year lows with the 10’s dropping to 2.35% but stocks in the US recovered suggesting the European weakness will be washed away once markets open this afternoon/evening. There is no underestimating the import of this move in bonds for stocks and currencies because it is a warning that something is up.

There are many different possible warnings contained in the price action but in this the bond market rally seems to be a combination of  market positioning and overall asset allocation concerns about he outlook for stocks.

US Treasuries at 2.35% look to be breaking into a lower bound once again and could be on the way toward 2%. Almost every pundit and forecaster thinks rates will be higher by years end which, in a pure market positioning sense, helps load the gun for a market rally (rates lower). Add in a dash of worry about stock market stability and you have a perfect set of conditions for the rally we are currently seeing.

And fuel for its continuance!

In Europe bond rates are down also because the economy is weak and with German 10′s closing at 0.96% on Friday, Italian and Spanish bonds rallying – down 4 and 12 points respectively – while in the UK 10 year Gilts fell 11 points to 2.33%, it is clear something is up.

At low rates capital price moves are huge so the German move represents a 5.88% capital appreciation in the price of the bond.

Turning to stocks and worries about Ukraine hit European stocks while in the US things we not so sour but stocks didn’t exactly surge into the weekend.

At the close US stocks were mixed with the Dow down 0.30% to 16,663, the Nasdaq rose 0.27% to 4,465 and the S&P 500 had a 22 point range with a high of 1,964 and a low of 19,42 before climbing into the close to end unchanged at 1,955.

In Europe stocks had an ugly day and even the most novice of chartists would be worried about the DAX which had a 1.43% fall after a solid open. Key here is the assertion by Ukrainian forces they struck a Russia APC convoy which snuck onto its a territory. The Russian said it was fanciful but the damage was done nonetheless. Elsewhere in Europe the CAC fell 0.90%, the FTSE managed to rally 0.06%.

That is an ugly candle for the DAX hihger high, lower low on the day so even though the open this afternoon is likely to be better its a warning of further loses.

Now something super important that happened over the weekend and worth noting in what is an ongoing debate about how the world – or at least markets – might look once the Fed moves from taper to tightening St Louis Fed Governor told Bloomberg (HT Ivan at FXStreet) that markets are mispricing the Fed intentions. “The market is trading too dovishly compared to the committee,I think that’s probably a mistake”, he said.

Danger Will Robinson!

Locally the ASX is likely to open higher with SPI200 September futures up 10 points to 5514. It’s a huge week of reporting for Australian companies so whatever the index does there may be a large number of company specific moves.

On currency markets at least we now know why the US dollar won’t go up – Foreignors have been selling US assets dumping a record $153.5 billion in June according to TIC data released on Friday. Euro continues to pause after the big fall recently and is at 1.3391 this morning trying to decide if the pause is for a base or before more weakness. Sterling is up this morning after BoE Mark Carney spoke to the Sunday Times and appeared a bit more hawkish on rates than recently – GBPUSD is at 1.6719. USDJPY is at 102.36 and the Aussie is at 0.9318.

On commodity markets both iron ore and Newcastle coal for September delivery were higher in trade Friday. Iron ore rose 75 cents to $93.63 a one while coal was up 40 cents a tonne to $70.65.

Nymex crude was up $1.77 to $97.24 while gold drop sharply at one stage Friday before recovering to $1,304 – the price action will have shaken up a few longs. Silver dipper almost 2% to $19.53 an ounce while coppper is at $3.10 a pound. On the Ags corn and wheat rallied 1.04% and 2.61% respectively while soybeans also climbed up 0.39%.

On the data front it is both a quiet but very important week for Australian markets and you can find my new and improved Aussie Market Diary over at Business Insider with all the details. Today however we see UK and Chinese house price indices and new motor vehicles in Australia. Tonight is the EU trade balance and US NAHB housing market index.

 

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