Overnight US equities fell sharply, after Bond yields in almost all maturities sored. But this time in particular short-term maturities. This is a signal that investors are now expecting an increase in rates sooner rather than later. For Yields to move like this it means everyone is trying to exit the bond space at the same time. The FED chair Jerome Powell tried to calm the market earlier in the week by saying inflation is not an issue. But it is hard to stop investors from taking profits when seeing such moves in the short-term yields space.
So, this is likely to be a short term pullback, how far it falls will come down to how much more the bond space will rise in the coming sessions. But investors are pricing in inflation that has not happened yet. Therefore, for their view of higher interest rates to play out, asset prices will likely be much higher than they are now. In other words, an inflationary period driven by stimulus and infrastructure spending should continue to see a move to Value stocks well before interest rates go higher.
This means we still have at least a few years of inflation ahead of us before the central banks take any action. The RBA has suggested they will not touch rates until 2024. The FED has also made similar comments. The forward horizon for Equities is still very bullish here, but the buyer is likely going to be in anything that will benefit from a recovery in the world economy and infrastructure spending.
The recovery theme continues most of the selling came into the Discretionary, Tech, and Communication Services. But all sectors were in the red last night. Also, we saw selling the metals space with Copper, Silver and Gold lower. The sell-off in copper once again is likely just some profit-taking. Iron Ore is holding strong above $170US.
Bidens go big Fiscal stimulus will likely be passed in the coming weeks, and the FED will remain extremely accommodative in the long term. The next round of stimulus has investors worried about inflation, but I see this as a positive for equities in the next year or so. Once again the selling here is likely to be short term, but will all come down to how much more selling we see in the short term bond space.
With a sharp fall across U.S markets last night, the XJO is expected to snap lower on open this morning. U.S futures have moved into the red, but there is elevated volatility, and this could easily reverse by our open or through our session.
The open this morning should see us test the key support are 6750. Whether we push through will likely come down to how U.S futures trade during our session. If they push harder into the red, our already panicked market could be scared into further selling in anticipation of extended falls overseas. Otherwise, if there is respite, then the market should hold roughly around these levels as it has done so before. What will help this is the fall in AUD overnight. Fortunately, when U.S markets have snap falls, their dollar typically rises which causes ours to fall. This helps our exporters, including our miners that make up the second largest sector of our market.
If the bleeding isn’t stemmed here, the next major support is at 6600, with 6666 as a decent stop along the way. If this ends up being a flash in the pan we could hold 6700 and rebound back towards 6900. It is likely that Monday is either subdued or we have another fall – unless we see a strong recovery overnight from the U.S tonight and even then the market can be quick to forget what happened two days ago.
US shares fell dramatically overnight, with financial media blaming rising government bond yields for the sell-off. There were big jumps in bond yields particularly at shorter-maturities, which until now were seemingly being kept low by the Federal Reserve. We also saw US GDP data released overnight which showed that the US economy grew at an annualised rate of 4.1 percent last quarter, just below expectations. Other economic data showed fewer than expected jobless claims, better than expected goods orders, but worse than expected home sales.
Rising government bond yields could eventually translate into higher borrowing costs for companies which could reduce corporate profits, higher bond yields also increase the opportunity cost of holding shares. Every major sector closed lower overnight, with tech shares the worst performers, while Basic Materials, Oil & Gas, and Financials stocks also fell strongly.