Mining GFC warms up on bond backup

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The Mining GFC has faded sufficiently that traders can again imagine the Federal Reserve raising interest rates. US bonds sold and short yields are still in a solid uptrend:

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Even so, the US dollar eased:

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As yen and euro rebounded:

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Oil fell: tvc_6e6e498580c3b128cd6c111e0e102b1d

Base metals too:

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Miners were clubbed:

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And US/EM high yield took a hit:

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We’re now approaching the next potential convulsion in the Mining GFC as Chinese stimulus and Fed patience have fired commodities enough that the opposite can now be contemplated by markets. From the WSJ:

Investors are bracing for a bout of rising bond yields, the latest sign that views on the global economy have turned more optimistic following a run of better-than-expected data.

The 10-year German government-bond yield hit 0.228% Friday, up from this year’s closing low of 0.089% on April 7. Over the same period, the yield on the 10-year U.S. Treasury note has climbed to 1.888% Friday from 1.69%. That partly reverses moves earlier this year, when tumultuous markets sent investors fleeing into the safety of government bonds, pushing their prices up and their yields down.

Big investors such as hedge funds are betting yields will keep going up. Earlier this month, they held a net $11.7 billion in 10-year Treasury futures contracts that would benefit from lower prices and higher yields—the highest since November, according to Cheng Chen, U.S. strategist at TD Securities. In late March, those investors held $5 billion in bets going the other direction.

The shift comes ahead of a meeting of the Federal Reserve that wraps up Wednesday. Few traders expect the Fed to raise interest rates this time around, but investors will be watching for signs that a rate increase could be on the table at June’s meeting. The Bank of Japan’s policy-making committee meets later in the week.

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For mine, it’s too early. I do not see the Fed hiking again until Q3 and even then it will depend upon data, which has been mediocre in the US, from Westpac:

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With labour market leading indicators clearly weaker than previously, there is absolutely no hurry for the Fed. In fact it is possible that the Fed is already done. My feeling today is that oil looks shaky again and if Saudi, Libya and Iran combine to boost output above “freeze” assumptions then oil is going to have to fall again to shake out more shale and that will reignite the high yield bond market chaos we’ve already witnessed twice. Thus, there is this from Bloomberg:

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Hedge funds and other large speculators are betting on dollar weakness for the first time in almost two years.

Positions that benefit from losses by the U.S. currency exceeded those that benefit from from a rally by a net 21,567 contracts in the week ended April 19, a report from the Commodity Futures Trading Commission showed Friday. That’s the first time since July 2014 that the data haven’t shown net long positions for the dollar versus eight other major currencies:

Any fall in the dollar will be mitigated by other central banks and if it does roll with a third round of oil weakness then I would still expect the Australian dollar to outpace it to the downside as risk turns well and truly off.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.