US markets reopened overnight after a long weekend, starting the session off in the green, but pulled back to closed slightly lower. Energy and Financials closed strongly higher as their market prices in the rise in oil over the weekend. Financials continue to catch a bid as they benefit from a steepening yield curve.
Many are blaming the strong rise in the yield curve for the weakness in the US overnight. Selling in the long-term bond space is sending a signal that inflation is on its way, which is a positive thing for asset prices including equities. But if inflation goes up too quickly it could lead Central Banks to increase interest rates. Everyone needs to remember here that the FED and RBA wants a period of high inflation to make up for the weak inflation that we have seen over recent years. The RBA went out of there way to reinsure everyone that rates will stay low until 2024. However, we need to remember that as the yields get higher Bonds become more attractive, so in the short term bonds could reach a level where investor move some money back into a safer asset class.
Analysts are increasing their expectations for 2021 as the recovery comes underway. Many are expecting the very accommodative central bank monetary policy and fiscal policy see company earnings recover. We saw WBC report a quarterly update this morning also showing a strong recovery from last years lockdowns. WBC also reported a strong Net interest margin of 2.06%. Banks locally still have some upside before they reach all-time highs and if this environment continues there is no reason, they couldn’t do it over the next 12 months.
The two major risks we need to watch out there at this stage is- we see another major COVID-19 Wave/lockdown. Or for whatever reason, the FED or RBA changes there to view and start to increase interest rates.
But at this stage, if the US can pass their go big fiscal stimulus, we will see momentum back into the US markets in the short term. So watch this space the democrats put there focus back int stimulus rather than impeachment trials.
The XJO is set to edge lower on open this morning, putting us just under 6900 – the post-fall highs we have been flirting with recently. The U.S had a fairly lacklustre night but their futures this morning have ticked into the green. If they can remain so during our session, our market should be able to hold these levels if not push into the green.
Local reporting could also help drive us, with RIO reporting and WBC giving a quarterly update. The AUD fell last night which should help our miners and if RIO today and FMG tomorrow report well, we should see strength remain in materials. In addition, U.S financials did well last night and if we see a good update from WBC, strength should also remain in our financials. With both sectors doing well, our market should follow suit as a whole.
Overnight US market climbed to fresh all-time highs before reversing to close slightly lower. There was no major economic data overnight and little news on the progress of further US stimulus, so markets only had themselves to focus on.
Though share prices around the world moved optimistically while US markets were closed, this wasn’t enough to cause US markets to close higher. There was some talk that rising longer-term government bond yields could be negative for some large borrowing stocks moving forwards. Oil and Gas stocks were again the strongest performers overnight, while Financials also rose nicely. Healthcare and Utilities fell to a degree, while most other sectors closed flat.