Chris Weston, Chief Market Strategist at IG Markets
Tide turns for the greenback
Bond market weakness has been a key theme across the US and European markets. This has now clearly started having an impact on equities with confidence being sapped out of the market. Janet Yellen’s comments warning that long-term rates are very low and will be vulnerable once lift-off occurs. This saw US treasury yields rise further while the greenback remained on the back foot. Traders have been looking for short term gains in currencies like the AUD and euro against the greenback. It remains to be seen whether this trade has legs though. In a time when investor sentiment is already shaky, Yellen rattled the cage further by suggesting equity market valuations are generally quite high. Emerging markets have felt the pinch in Asia with concerns about inflated equities hurting China. Whether this is a ploy by the Fed to prepare the market for a change in stance/lift-off remains debatable but this is enough to see caution prevail it seems. Fed member Dennis Lockhart was also on the wires saying market expectations of a September tightening align with the likely policy action. While Fed members seem to be preparing investors for lift-off, there will be real questions around the US economic recovering and faltering growth. Yesterday’s ADP non-farm payrolls reading was yet another cause for concern after falling short. The reading showed 169,000 jobs added when the market was expecting around 199,000. This impacted expectations heading into Friday’s official reading which is expected to show 227,000 jobs added. With expectations being quite high there is plenty of room for disappointment. A minor positive was the improvement in labour costs which implies wages are headed in the right direction. Unemployment claims will be interesting to watch later and could lead to further USD weakness should it disappoint.
Banks bounce back
Staying with the jobs theme, Australia received the April jobs numbers. The domestic economy has been showing signs of improvement recently which put pressure on the jobs release to reflect this. Unfortunately, the reading was lacklustre with 2,900 jobs lost when the market was expecting 6,500 jobs added. The unemployment rate also crept up to 6.2% but this was in line with expectations. The market seems to have focused on the revisions to the employment change for March. The employment change was revised up to 41,300 (from the previously reported 31,500) full time jobs. The AUD initially dipped on the announcement but started rising again shortly after. AUD/USD is still knocking on 0.8000 with momentum remaining to the upside. It’s been another tough day for the ASX 200 but perhaps a positive is the fact the big banks managed to recover from the lows. CBA, ANZ and WBC all turned positive at some stage while NAB remained in a trading halt. With all four big banks having reported now, the next few weeks heading into the end of the financial year will be interesting. As the banks’ share prices fall, their dividend yield actually goes up and this will likely remain an attractive proposition for investors.
Caution on UK General election
Ahead of the European open we are calling the major European bourses mildly weaker. The recent strength in the euro is likely to start taking some life out of equities given the inverse relationship the two have. Some traders are still hopeful the euro strength is only a flash in the pan but until we see a shift in trend, the near term momentum remains strong. On the calendar we have German factory orders and French industrial production. The General Election kicks off in the UK with voting commencing. This is likely to result in cautious lacklustre trade and the results will have more of an impact on tomorrow’s trade. It will also be interesting to see what happens with the sterling as it’s likely to be the first instrument to react to the developments. Once the uncertainty is taken out of the market, we could actually see some strength in the currency.