Investors consider the implications of rising bond yields and a stronger $A
Investors will be faced with an interesting set of macro developments when trading resumes on the stock exchange this morning.
Last night’s news of better than expected inflation in Europe, together with the latest iteration of hopes for a settlement of- the Greek debt crisis have reignited selling in world bond markets. Equity markets and central banks will be hoping the increase in bond yields remains relatively limited at this stage. With stock market valuations at relatively high levels, investors would be best served by a gradual increase in bond yields in line with improvements in economic growth rather than a sharp pre-emptive rally towards long term historical averages in bond yields.
Stronger Eurozone inflation and relief that risks of deflation are receding led to a rally in the Euro last night and general selling of the $US. This added fuel to yesterday’s RBA inspired rally in the Aussie Dollar. This may be a negative for those local stocks with significant international investments in today’s trading.
While markets appear to have been disappointed that yesterday’s RBA statement did not include a more explicit easing bias, it seems clear the Bank has left the door open for further rate cuts. The Governor’s statement noted that the decision to leave rates unchanged was appropriate for this meeting. There was no mention that this stance was likely to be an appropriate stance for some time to come. The statement went on to note that the Board’s future stance on policy would be informed by information on economic conditions and all this against a background of anticipated below trend growth persisting for some time yet.
Today’s data on first quarter GDP has the potential to influence both consumer and investor confidence. A weak number with growth slipping below 2% will do nothing to help current business caution and tepid future investment plans.
Markets will also be focussed on today’s release of China’s Services PMI with investors expecting further signs of expansion and long term re balancing of the economy away from heavy manufacturing exports.
From a technical point of view the 78.6% Fibonacci retracement of the late May rally in the ASX 200 index has some significance. This retracement level is at 5623. If the index manages to hold above this level, the sell-off over the last two days would still be consistent with a correction rather than a move to new lows.
For further comment from CMC Markets please call 02 8221 2137.
Frequently Asked Questions about this Article…
Rising bond yields can affect stock market valuations by making bonds more attractive compared to stocks. This can lead to a shift in investor preference, potentially causing stock prices to decrease. However, a gradual increase in bond yields, aligned with economic growth, is generally more favorable for maintaining stable stock valuations.
Stronger Eurozone inflation can lead to a rally in the Euro as it signals economic improvement and reduces deflation risks. This can result in the selling of other currencies, such as the US Dollar, and impact currency exchange rates globally.
A stronger Australian Dollar can negatively impact local stocks with significant international investments. This is because a stronger currency can reduce the value of overseas earnings when converted back to Australian Dollars, potentially affecting the profitability of these companies.
The RBA decided to leave interest rates unchanged as it deemed this stance appropriate for the current meeting. However, the RBA has left the door open for future rate cuts, indicating that their policy decisions will be informed by ongoing economic conditions.
Today's GDP data could significantly influence investor confidence. If the growth rate slips below 2%, it may exacerbate business caution and dampen future investment plans, potentially leading to a decrease in investor confidence.
China's Services PMI release is significant for investors as it provides insights into the expansion and rebalancing of China's economy away from heavy manufacturing exports. Positive signs of expansion can boost investor confidence in China's economic stability and growth prospects.
The 78.6% Fibonacci retracement level at 5623 is a technical indicator for the ASX 200 index. If the index holds above this level, it suggests that the recent sell-off is consistent with a market correction rather than a move to new lows, providing a potential support level for investors.
Investors can contact CMC Markets for further commentary by calling 02 8221 2137. This provides an opportunity to gain more insights and analysis on current market conditions.
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