The decline in bond yields and the US Dollar in response to Janet Yellen’s speech extended for a third day. This ongoing adjustment in bond and currency markets indicates that the Yellen speech was a sea change for market thinking. It’s clear that unless economic circumstances change, US rates will stay lower for longer. Markets are now contemplating the prospect that the Fed rate will not move above 1% for at least 18 months.
While bond and currency markets, continued their adjustment to the Yellen speech, equity markets paused. This probably reflects trader caution leading into the US profit reporting season. US stock markets are now also much closer to the top than the bottom of valuation ranges that have applied over the past year. This may be tempering buyer enthusiasm.
Bank stocks have been the key to the Australian market this week and may be today as well. Traders will be looking for early signs of whether yesterday’s bargain hunting recovery continues or whether investors are content to follow the international lead with a wait and see attitude on bank stocks today.
Ongoing softness in commodity prices is weighing on the Aussie Dollar which did not do as well against a weaker $US as the Euro last night. Commodity markets have got ahead of the fundamentals over recent weeks, making them vulnerable to a correction. This creates downside risk in the event that today’s release of China’s manufacturing PMI is materially worse than expected.