Global equities continue to fire, although with the S&P 500 bang on the top of the rising channel, today’s session could be very interesting. Market internals are starting to show signs that stocks could use a pullback, with 87% of S&P companies trading above their 50-day moving averages and nearly a third of stocks at 52-week highs. Again, the ‘buy Tuesday’ trade continues to work, with eighteen consecutive positive Tuesdays, and what’s more, according to Bespoke Investment group, 82% of the DOW’s gains since January 15 have come on this day. Clearly more and more cash continues to pour in from the sidelines.
The bond market continues to be our number one focus on a multi-asset investment level: whether it be in the US, where the ten-year treasury looks like it will once again test 2%, or more worryingly the Japanese bond market (JGB) where the ten-year JGB has moved from 56 basis points to 90 basis points in eight days. As day went on though buyers came back into the market and the yield fell back to 86bp. Higher yield are a key issue in Japan, where the domestic banks sit on a sizeable portion of issuance, and thus moves higher in yields (lower in prices) throw the credibility of their balance sheets into question as the assets are effectively deteriorating. You can see therefore why the financial sector is down 0.4% today, despite a very strong tape. This is the last thing the BoJ wanted to see, although the prospect of the bank having to print more JPY to ramp up debt purchases to keep yields suppressed keeps us from being long JPY.
The Nikkei hasn’t really shown too much concern today on the earlier move higher in yields and has smashed through the 15,000 mark. USD/JPY has continued to find buyers, hitting a new high of 102.43. Trading the pair is tough as the market wants to buy dips, though dips are shallow; however, it is looking rich at current levels, but shorting is unrewarding and to be fair you’re fighting a pretty strong trend.
Australia has been in focus given yesterday’s budget, although the market has been more greatly influenced by a sizeable downgrade from United Group and BHP/RIO’s cost-cutting initiatives. There’s not much we can say that hasn’t been written about 100 times about the budget, but from a fixed income point of view, it’s positive that both S&P and Moody’s have affirmed Australia’s AAA/stable and Aaa/stable rating. While there is an elevated level of private debt, public debt is forecast to peak at around 23% of GDP in 2014 to 2015, still obviously well below its peers. Taking into account assumed revenues and expenditure the Australian government will need to issue (gross) just under $45 billion of debt over the next couple of years, before declining to $16 billion in 2015 to 2016. Given the limited amount of super AAA-rated sovereign bonds, we can’t see any issues here.
AUD/USD fell to a low of 0.9877 in US trade, and despite trying to make a move above 0.9900 (the pair hit a high of 0.9917 in the Asian session) the pair looks dangerously close to breaking key support at 0.9870 (200-week moving average and rising longer trend on both daily and weekly charts). A weekly close below here would see the 2012 low of 0.9580 come into play. Clearly the talk of an improving US deficit position is helping as well, with the CBO (Congressional Budget Office) now forecasting a US budget deficit of $642 billion, or 4% of GDP for this fiscal year. This is down from $1.1 trillion forecast in 2012.
Both the Shanghai Composite and Hang Seng are taking differing paths, with the Hang Seng up 0.7%, while the Shanghai Composite is unchanged.
European calls at this stage are once again positive, and it will be interesting to watch not just whether the markets can make new highs, but of course the price action in EUR/USD and cable. We were looking at short positions in GBP/USD yesterday given the channel break and the pair hit a low of 1.5209. 1.5250 could be a level that the bears may want to add to shorts from here. EUR/USD also printed a bearish outside day and could test 1.2900 in the short term, especially if German and French preliminary GDP comes out lower than anticipated. In the UK we get employment data in the shape of claimant count and ILO employment rate. Mervyn King delivers his final inflation report, and clearly he will be reasonably happy that some of the data is showing signs of stabilisation.
On the earnings side, we get numbers from the London Stock Exchange, Easyjet, Land Securities and Allianz.