Over the past few weeks, we have seen massive selling in the Bond space. It started in the longer-term space, but late last week we saw a broader sell-off across all maturities. The selling came from fears that Inflation would start to rise too quickly given the amount of stimulus in circulation. However, Investors piled back into Bonds Friday after the US economic data PCE Index indicated subdued inflation.
Friday, we saw a rotation out of recovery stocks, including metals and Crude back into Tech with the NASDAQ closing in the green. This is a major change of the theme in the market which was a move back into recovery and value stocks. With the US fiscal stimulus passing the house of representatives over the weekend we could see Tech and Discretion continue to run this week. But we still need to see the stimulus pass the senate.
Value stocks are still extremely attractive medium to longer-term, as vaccines continue to be rolled out and economies reopen. But in the short term, the flavor of the week or month can change very quickly. The next few days will tell us a lot about what the theme of the market will be in the short term.
Copper and Crude are a strong indicator of the move to the recovery space. Copper is widely used in infrastructure and be in high demand in the coming years. It will therefore go up and down in the short-term depending on the sentiment towards recovery.
The XJO is expected to have a soft open this morning as it weighs both the falling bond yields Friday and the potential passing of stimulus from U.S congress announced over the weekend. The U.S was lower on Friday, but our market arguably had priced that in during our session.
U.S futures sit flat to in the green, so our market is likely to need stronger leads during our session in order to make any sort of decent recovery. What is likely to help the recovery or at least keep our market buoyant is the strong falls in the AUD which notably help our miners.
Things seem tentative at the moment, and the market is deciding if the recent selling is a simple flash in the pan, or the sign of a short-term correction.
Locally we have the RBA cash rate tomorrow, where the market will be listening to what Lowe will say about the future of inflation. The cash rate is expected to remain unchanged.
US shares closed lower again on Friday, though the pace of selling definitely moderated. Shares had been worried about the rapidly increasing government bond yields, and a drop in yields on Friday helped sentiment improve. There were also some positive economic reports on Friday, with US consumer sentiment and consumer prices coming in better than expected.
The real story at the moment continues to be the government bond yields however, so watch for any comment from the Federal Reserve about intervention in the bond market, particularly any further quantitative easing.
Technology was the only major sector to finish higher on Friday, while Oil & Gas, Utilities, and Telecoms were the weakest sectors. The latest on the US fiscal stimulus front is that President Biden’s $1.9trn package was passed by Congress over the weekend and will now head to the senate; should this bill be signed into law, it should be a bullish catalyst for US shares.