The global sell-off in government bonds accelerated overnight, sending US sharemarkets lower, commodities higher as the US dollar fell. As a result long-term borrowing costs rose to their highest level this year.
As a result, the Australian market will again start in the negative with a loss of around 0.4% on the ASX 200 futures.
But a little of the sting was taken off the falls with American markets halving their losses in the last hour of trading.
Comments in Washington overnight by Fed chair, Janet Yellen, that US share prices were high, didn’t help the febrile state of investor sentiment and the US sell off started in the wake of those relatively tame remarks.
Normally the surge in iron ore prices, which topped $US60 a tonne for the first time in weeks, would help market sentiment here, but investors are waiting to see the interim profit report from the National Australia Bank this morning in the wake of the weak trading update from the Commonwealth Bank which helped spark yesterday’s $40 billion ASX sell-off, along with that weak third quarter sales report from Woolworths.
Ten year bond yields rose in all major markets – reaching 2.92% in Australia, up 13 basis points, a sharp rise for our market. In the US the yield on 10 year Treasuries ended on 2.23%, up four points – German 10 year yield touched 0.60% and closed on 0.59%, up seven points (remember the yield was 0.05% less than a month ago).
The US dollar tumbled to over $US1.12 to the euro, but the Aussie dollar surprisingly maintained its value, trading around 79.70 – not much changed from the night before.
European equities steadied and closed just in the green, after that big sell-off in Australia that wiped $40 billion from the value of the ASX and saw the Shanghai market lose another 1.6%, on top of the 4.06% lost on Tuesday.
Driving the sell off in bonds is belief the deflation threat has gone, as it faded across Europe and even Japan. Oil prices are up more than 50% this year thanks to speculators and rising prices set by saudi Arabia, and the slow weakening in US oil stocks and production.
Complicating matters is the weakening in the pace of US economic activity – which is complicating the markets’ view of when the Fed will raise rates – many now don’t see a rate coming until next year. Friday night’s jobs report for April will play a major part in framing the market’s view of the Fed’s next move.
But that should be helping bond yields lower, not higher. The importance of the jobs report tomorrow night is high.
Oil prices jumped another 2% on Wednesday to their highest this year, before easing a touch in the US. Gold rose, but then eased, even though the weaker US dollar should have sent it much higher.
Germany’s 10-year yield hit a 2015 high just under 0.6%. The yield has more than tripled in a week and risen 10-fold in just three weeks, wiping out all the gains made this year.
Yields on 10-year Spanish, Italian and UK government bonds also hit year highs before falling back below Tuesday’s closing levels. The UK 10 year bond hit a yield of 2.01% on the eve of the confused general election, before ending at 1.98%.
The rebound in iron ore prices continued overnight, taking the gain in the past two days to 9%. The price topped $US60 a tonne for the first time in two months.
Iron ore delivered to the Port of Qingdao rose $US2.19, or 3.7%, to $US60.89.
Iron ore has now gained 30% since early April when it was traded as low as $US46.80 a tonne.
The Australian market will resume in the red this morning with the futures market showing a loss of around 30 points.
That was after the ASX 200 closed at the session’s lows late yesterday, with the All Ordinaries off 2.1% at 5690.9 and the ASX200 2.3% lower to 5692.2 – its first close below 5700 since February.
Commonwealth Bank, which fell nearly 6%, and Woolworths, 5%, were responsible for more than one-third of the loss on the ASX200. The other banks lost ground as well.
