Banks the key to today's market

The question of when and how fast the US Fed begins to lift interest rates remains the dominant macro issue for equity markets and will be front of mind for traders again today.

News of weaker than expected home sales in the US last month dampened the economic optimism ignited earlier in the week by news of stronger than expected US housing starts. This bad news is good news theme saw US bond yields continue to retreat last night settling around 2.19% compared to the recent spike high at 2.36%.

With stock markets valuations relatively high, markets remain very sensitive to the trend in bond yields. The fact that the bond sell off has been arrested will be a plus for yield stocks, especially banks. While the most likely scenario is for investors to remain relatively cautious heading into the weekend, the risk for today’s trading may be to the upside. Bank stocks have been sold heavily in recent weeks. CBA for example closed 13.5% below its peak yesterday. Some relief on expectations for Fed tightening may be enough to see bargain hunters start to return in earnest given the recent improvement in bank dividend yields.

Last night’s jump in oil prices is also likely to see some support for energy stocks today. However, moves may be relatively limited given that the rally in oil prices appeared related to optimism over the Fed rather than any reassessment of the supply situation in the oil market.

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