Financial markets head into the final day’s trading for the week (and into the start of the US second quarter reporting season next week) in a state of growing confusion.
Amidst continuing signs of a strong global economy – especially the US – bond yields continue to fall and there’s no ready answer or explanation for the sudden slide that has gathered pace in the past week.
In the middle of all of this, Aussie 10-year bond yields and the value of the dollar have fallen to multi-month lows – bonds since February and the dollar to lows not seen since last December.
The 10-year US treasury yield on Tuesday topped out at above 1.44% in the first session back from the Independence Day break. On Thursday it fell to just under 1.25% – that’s a huge fall without an obvious explanation.
That’s usually a sign of growing concern about the pace of economic growth, but economists and market analysts dismiss those worries.
Other theories advanced for the slide in the key 10-year yield on US Treasury bonds to 1.25% on Thursday, the lowest since February include: the Chinese government crackdown on tech stocks, and other Chinese companies listed on Wall Street, a short position in bonds by big investors confident about soaring inflation, but who were caught out by the surge in bond prices (and slide in yields) or the growing threat from the Delta variant of Covid.
The latter was given more credence by the state of emergency declared for Tokyo and the Olympics by the Japanese government, which also includes banning spectators. That directed the attention of the lazy in markets to the continuing surge in Delta variant infections around the world.
As well the unease in oil markets continues, though prices edged up Thursday after data showed a big drop in US petrol sticks, but that was a false dawn – there’s still no hint of a new production cap deal by the OPEC+ group.
Some investors worry that the Fed is sending confused messages, but central banks always send ‘confused’ messages in the eyes of many traders who can’t or won’t take a position.
And while the US dollar’s rise eased a little on Thursday, it didn’t stop the Aussie dollar sliding to its lowest level since last December around 74.28 US cents.
The 10-year U.S. Treasury yield fell as low as 1.246% before jumping back to 1.293% and then fading to just under 1.30% in early Asian trading on Friday morning.
The session’s low was the lowest since February. Australian bond yields continued to follow with the yield on our 10-year bonds reaching 1.31%. That’s also the lowest since February of this year (The bond buying quantitative easing by the Reserve Bank is keeping our 10-year bond yield close to that of the US to put a lid on the value of the Aussie dollar as well).
Wall Street faded on Thursday with the Dow down 259.86 points, or 0.75%, to 34,421.93, the S&P 500 shed 37.31 points, or 0.86%, to 4,320.82 and the Nasdaq lost 105.28 points, or 0.72%, to 14,559.79.
All 11 major sectors of the S&P 500 ended in the red, with financials suffering the largest percentage loss ahead of the start of the June quarter’s financial report next week from the country’s biggest banks.
The ASX 200 futures were showing a loss of 48 points at 7.30am Friday, Sydney time. That was better than the 77-point low early on in the session.
China’s crackdown on the country’s big tech companies continues to be another factor hitting investor confidence.
Since China’s opening shots over the weekend against ride-hailing app Didi Global, Beijing has broadened its scrutiny of US.-listed Chinese companies beyond the tech sector.
Didi shares dropped 5.9%, while Alibaba Group and Bidu Inc shed 3.9% and 3.7%, respectively.
Chinese stockmarkets have fallen – down nearly 2% in the past five trading sessions as the tech crackdown reverberates. But Hong Kong slumped sharply on Thursday, losing 2.89% to push it into negative territory for the year so far against a 14% plus rise for the S&P 500.
The Hong Kong market is increasingly seen as being a clone of the Shanghai and Shenzhen markets and captive to the whims of the hardline Communist Party run government in Beijing.
Oil prices bumped higher on Thursday for the first time this week thanks to a big fall in US crude stocks and reserves of petrol (a sign of the summer driving season’s usual high consumption).
Brent crude oil futures rose 69 cents, or 0.9%, to settle at $US74.12 a barrel, and US West Texas Intermediate futures rose 74 cents, or 1%, to settle at $US72.94 a barrel.
Early in the session, both contracts fell to their lowest in about three weeks.
American crude inventories fell by 6.9 million barrels last week to 445.5 million barrels, according to the Energy Information Administration weekly report.
Petrol stocks fell by 6.1 million barrels in the week to 235.5 million barrels, the EIA said, three times market forecasts.
But these are temporary demand driven falls. The big issue remains the lack of agreement on a new production cap by the OPEC+ group. If that happens, watch oil prices surge past $US80 a barrel in relief.
