The theme in the market has come back to selling overvalued tech stock and buying stocks that will benefit from the economic recovery. Considering the progress of Vaccines, coupled with all the stimulus and extremely accommodative monetary policy, there is no surprise that investors are jumping out of stay-at-home stocks. The only thing that was surprising to me overnight was the move lower in base metals like Copper and Aluminium, but they have been running hot recently.
Bonds are still selling but in a much healthier way. One would expect bond yields to go up here whilst the recovery becomes underway. If they rise too quickly investors see this as a warning sign. Generally, the 10-year bond which is classified as a risk-free asset will likely stay above the perceived rate of inflation. People who own assets like this need to at least gain a return at or above yearly inflation or they lose money.
Chances are the FED are doing some form of yield control to help keep the bond market in check. We expect to hear more about this in the coming weeks. One way or another though this market is rigged to go higher as Central banks continue to do whatever it takes to support economic recovery.
Biden’s stimulus is also in focus as we wait for it to pass through the senate. News overnight on this front is that Biden is dropping the increase of the minimum wage out of the stimulus bill. This will help the bill pass quickly.
The XJO is set to move lower on open this morning following further sell offs in the U.S last night. It seems the yield moderation was short lived.
Until the Fed commits further with renewed vigor, markets will likely continue to send them a message – essentially holding a gun to its own head with its invisible hand. Although short term jitters look like they are here to stay, positive sentiment remains overall and markets are still holding trend.
With strong falls across many commodities overnight, our miners might feel some of the pain though this may be offset a little by a fall in the AUD. Iron Ore has remained steady and so has oil. RIO and BHP go ex-div so expect a large move down on open on each.
US shares closed lower overnight, with tech stocks once again bearing the brunt on the selling. Stocks were led lower by a further gain in government bond yields, which was partly driven by rising inflation expectations; bonds are pricing in their highest five-year inflation expectations since 2008.
Fed Chair Jerome Powell will speak at a jobs conference this week and many are anxious to see how he responds to the recent volatility. Overnight US economic data was also fairly weak, with lower jobs created and weaker non-manufacturing conditions than expected. Technology stocks were the weakest performers by far overnight, while healthcare and basic materials stocks also fell. Financials, Telecoms, and Oil & Gas stocks closed higher.