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.

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.

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