MARKETS SPECTATOR: Wonderland investing

The US Fed's monthly $US85 billion bond-buying program has created absurdity in the markets that has spread to Australia.

It’s Alice in Wonderland time for markets. Up is down and down is up.

US 10-year treasury bond yields have risen to 2.18 per cent from 1.5 per cent earlier this year on the expectation the US economy is recovering. Data seems to support such thinking. The US National Association of Homebuilders/Wells Fargo Index rose to its highest point since April 2006. But the data may have been artificially inflated by the Federal Reserve’s monthly $85 billion bond-buying program.

If Bernanke this week singals strongly a tapering of such monetary stimulus, chances are bond yields may rise as investors realise the US economy’s nascent recover cannot continue without continued Fed stimulus. Bond yields may then retreat as investors flee once again to the perceived safe haven of US treasuries.

Such perverse thinking is what stock markets and investors as far afield as Australia may be thinking. It may account for volatile trading. The S&P/ASX200 Index rose 2.76 per cent over over Friday and Monday, yet today the index has fallen as much as 1.2 per cent.

“There is perverse logic and saturated valuations,” says Damien Boey, Credit Suisse’s Australian strategist. “It’s a reflection the system is optimised.”

At 1415 AEST the index had dropped 39.882, or 0.8 per cent, to 4786. All sectors in the S&P/ASX200 Index were down. Oil and gas and utility sub indexes both fell 1.3 per cent. The financial sub index slipped 0.8 per cent, the telecommunication sub index slid 0.8 per cent and consumer services sub index declined 1 per cent.