By: Thomas Barry
Equity markets are expected to be buoyed throughout the week by positive political news. The standout news is of course North Korea’s agreement to cease hostilities and dismantle their nuclear weapons program. Additionally, border tensions along the disputed Chinese-Indian border appear to be easing as Chinese President Xi Jinping and Indian Prime Minister Narendra Modi met to discuss greater cooperation in the border region. These two events should add positively to Asian equities and the broader global market as well.
Globally, rising bond yields have investors worried about valuations. With US treasuries hitting 3% in the last week (the first time in four years), any further rises might trigger a sell-off from investors who begin to rotate their portfolios into higher yielding bonds. Despite the strong earnings season in the US, with 80% of companies beating analyst expectations so far, stocks have disappointed. The costs of doing business have increased for many companies through higher borrowing costs, commodity prices, and rising wages as inflation looks to pick up. It’s possible that rising earnings may not be sustainable given the outlook for costs.
As mentioned earlier, easing global political tensions will cause some weakness for traditional safe-haven commodities like gold. Other commodities may hinge on the outcome of upcoming trade tariff negotiation. Oil prices are likely to be supported by OPEC production cuts and sanctions on Iranian oil. Bank of America Merrill Lynch analysts have forecast Brent oil to hit $80/bbl.
The Australian Dollar has fallen in the past week as Australian bond yields lagged behind rises in the US. A dovish tone from the RBA, which meets this Tuesday, could lend further support to a weakening of the Australian currency which now sits just below $0.76. The Euro and Pound, which also fell last week against the US Dollar behind dovish European Central Bank commentary, may see some bounce back if economic data surprises on the upside. Key data to watch include German and Italian CPI, as well as GDP growth for the Eurozone and Italy.
The RBA is expected to keep rates on hold at 1.50% on Tuesday. While easing political tensions might normally lead to rising bond yields as investors move away from safe assets, economic data is likely to dominate yield movements throughout the week. US 10-year treasuries are the focus for most investors, however keep an eye on rising 2-year yields as an inverted spread between 10 and 2-year yields is a gloomy signal of an impending recession.
Sources: Bloomberg, Reuters, Australian Financial Review