Bond market volatility increases, with implications for risk appetite

Macroeconomic/ geopolitical developments

• Fitch Ratings downgrading of US sovereign debt set the ball rolling on a volatile week on bond markets. This was exacerbated by the Treasury announcing it would increase its quarterly rebalancing amount. Yields spiked and risk appetite plunged. The legacy of this could still play out this week with the Treasury bond auctions on Wednesday and Thursday.

• Weaker than expected Non-farm Payrolls (although wages and unemployment held up) caused a rally in risk appetite on Friday. Markets still like it when the probability of a Fed rate hike at the next meeting reduces. CME Group FedWatch has it around 13% now.

• Chinese stimulus continues to drip feed through. The People’s Bank of China will support the property market with the help for private bond issuance and financing. This is positive for risk assets such as the AUD and Oil futures.
• The Bank of England hiked interest rates by 0.25% as expected.  

Global financial market developments

• Corporate earnings are still coming in with a trend of beating on sales and earnings estimates. However, it is the outlook that traders seem to be reacting to. Apple still cautioning for a sales decline hit the shares, whilst Amazon being upbeat on its cloud computing business helped to boost its shares. We have broken the back of earnings season now, with Eli Lilly and Disney in focus this week.

• Index futures had a sharp correction but are now looking to build support once more. E-mini S&P 500 futures need to hold the rebound from 4506 with e-mini NASDAQ 100 futures needing to build again from 15340. 
• A sharp bear steepener to the US yield curve, with longer duration yields sharply higher whilst shorter duration yields have fallen (especially since the US jobs report).
• The rally in the US Dollar Index accelerated on the risk aversion, but has now turned back on the payrolls report to leave an important high at 102.84. The key gauge of support is now 100.55/100.78.
• Gold remains negatively correlated to the USD. As USD has fallen Gold futures have rebounded from $1920. This is now an important gauge of support protecting $1892.50.
• Oil futures have battled well against the mid-week shock to risk assets to sustain the move towards a test of the April high at $83.53.

Key this week

• Central Bank Watch: No central banks are reporting this week. Watch out for the FOMC’s Harker and Bowman speaking on Monday.
• Macroeconomic data: US CPI dominates the data for the week on Thursday. It is all about trade balances and inflation. China’s trade (imports & exports) is on Tuesday with Chinese inflation (CPI & PPI) Wednesday. US PPI and Michigan Sentiment are released Friday.

Steve Miley (The Market Chartist)

Editor in chief

Steve Miley is the Market Chartist and has 32 years of financial market experience and as a seasoned expert now has many responsibilities. He is the founder, Director and Primary Analyst at The Mar... Continued