By: Anas-ur-Rasheed Khan
The S&P 500 reported weekly losses last week with trade tensions and rising bond yields taking centre stage. The markets, particularly in the US, have been been reacting sharply to any data that provides input into future interest rate expectations. The FOMC meeting minutes in relation to the 2nd of May decision to hold interest rates steady will be coming out this Wednesday. The market is likely to react sharply to any piece of information that may reveal any insight into the potential path of future interest rate hikes. Important jobless claims data will also be coming out on Thursday, which will provide further insight into US labour market conditions, which has tightened significantly in the past few months with unemployment currently standing at all-time lows.
The Australian equity markets also seem dismayed by what is going on in the world’s largest economy. ASX futures are currently down heading into the market open. The focus again is on the trajectory of global interest rates, which are dictated by the US Federal Reserve. In focus will also be the speech of the Reserve Bank’s governor, Philip Lowe, at the Australia-China institute. His speech is likely to cover important topics such as the Australian economy’s dependence on China, and global trade.
The fixed income markets have been volatile over the past few weeks, since the Fed’s decision to keep interest rates at a halt. The all-important 10-year US treasury yield finally broke past the key psychological level of 3%, which sent the equity markets in a downward spiral. FOMC meeting minutes coming out this week will be closely watched as investors itch to find any insight into the Fed’s future path to tightening. Any dovish signals in the report, however, can potentially send bond yields crashing again.
In Australia, according to Macquarie’s analysts, the 10-year yield has a clear path to the upside until 2020. The 10-year currently yields around 2.9%.
A rising US dollar has weighed heavily on commodities recently, but oil seems to be in a class of its own. Geopolitical tensions and the US exit from the Iran nuclear deal has sent WTI crude rising above $70 a barrel. There seems to be clear lack of consensus in the market in regards to how much oil is going to come off the market as a result of sanctions on Iran and rising US production that potentially offsets that. However, future trajectory of oil prices will hinge mostly on OPEC’s strategy. Further clarity on this will surface at OPEC’s upcoming meeting in June.
The US Dollar continued its advance amid rising yields and higher interest rate expectations. The Euro declined against all major peers after reports emerged that Italy’s two largest populist parties agreed to form a coalition program that included tax cuts and more fiscal spending.
Emerging markets currencies brace for yet another blood bath this week as US treasury yields are expected to keep on rising. A lot will depend on the FOMC minutes report, which will dictate the direction of currency movements for at least the next couple of weeks.
Winter has arrived in the real estate market, which is historically been the quietest period of the. Sydney auction rates decreased by almost 50% this week, officially signalling the start of the quiet season. But analysts say this is a mere exacerbation of a trend that is already underway. House prices have been fallen in Sydney by almost 5% over the last 12 months, whereas Melbourne house prices are still rising marginally. There has been a slowdown in the real estate market more broadly in Australia, which, according to analysts is a much better alternative to reach normalisation in the market than an abrupt crash in house prices.
Sources: Bloomberg, Australian Financial Review, SMH, Marketwatch