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Dear Reader,
Equity markets may have stemmed the big declines seen at the end of September.
The US Dow Jones added 925 points from the low last week to Friday’s close.
And that’s great news for buyers of momentum stocks like the ones we trade in our Momentum Stocks strategy.
But whilst stocks have recovered, bond prices have fallen further as yields increase ahead of the likely start of tapering by the Fed in early November.
Yields on the 10-year treasury have jumped from 1.35% a month ago to 1.61% now.
The jump in global energy costs have also rattled investors as concerns mount that the jump in commodity prices could have a more longer lasting effect on inflation.
It’s not just in the US either. Bonds yields have been on the rise in all developed and developing countries as supply bottlenecks have been exacerbated further with “buying at any cost” from the Chinese for energy supplies.
Explainer: Why do bond yields matter?
Governments and businesses issue bonds to finance their operations. The amount borrowed has an annual coupon, or interest rate, that is paid by the issuer to the owner of the bond.
If the demand for Bonds starts to reduce and inflation picks up – as discussed inflation is really the enemy of bonds – then the return or yield must rise to compensate those holders.
So, if yields rise, it costs more for issuers – that’s governments and businesses – to raise capital which has a direct impact of their operations by raising financing costs.
Of course, that is one of the reasons why central banks carried out QE, the active purchases of bonds from the marketplace to lower borrowing costs and inject huge sums of cash into the financial system.
Here in the UK, energy prices have been in the headlines for three weeks now as the steel sector and other large consumers start to feel the effects of record high gas prices, which have increased tenfold in some cases.
Investors were concerned that the UK could suffer an imminent rise in interest rates just when growth was looking vulnerable in the wake of these price shocks and supply bottlenecks.
Like in the US, 10-year bond yields here in the UK have also been caught up in the global rose in bond yields with yields jumping to 1.16% from 0.65% a month ago.
Review of last week’s key action
FTSE +68 +1% DOW +419 +1.22% S&P +34 +0.8% NASDQ unch DAX +47 +0.33% NIKKEI -722 -2.5% Hang Seng +262 +1.07%
Equities recovered their vigour mid-week.
But on Friday, US Non-Farm payrolls disappointed, with just 194K jobs created against an expectation of 500K.
The previous month’s figure was revised up 135K jobs, but it was still a miss of 165K jobs.
Despite the poor headline number, analysts seem to think that the report contained enough positives, such as the drop in the unemployment rate to 4.8% and the upward revision of last month’s number by 130K, to encourage the Fed to start the tapering process in their November meet.
EURUSD -0.22 -0.2% GBPUSD +0.68 +09.5% USDJPY +1.15 +1.03%
The US Dollar nudged further higher last week and, like equities, slipped a little on Friday following the underwhelming NFP data.
Sterling continued to recover the losses from the start of the month as analysts weighed up the prospects of higher rates and the talk of stagflation.
Gold unch UK OIL +3.33 +4.2% US OIL +3.78 +5%
Despite pressure being exerted on OPEC by Biden administration, the OPEC cartel did not move on its planned production. The problem consumers have now is the spill over effect from Natural Gas.
The price lats week for natural gas is the equivalent of $200 per barrel for oil so you can see why any consumer who could switch to crude would do!
Gold made a small increase early on last week, but the stronger US Dollar reversed those gains for the metal to end up unchanged largely on the week
Data / events for the week ahead
Calendar of data release is usually quieter the week after the US employment data – which is the case this week.
The key data, in light of a jump in energy prices and these supply bottlenecks, will be the US CPI (inflation) reading.
Also, the usual smattering of central bank speakers which seem largely to be concentrated from the US rate setting committee, the FOMC.
The UK’s relationship with the EU will occupy the front pages as the Norther Ireland protocol.
Monday
US US banks shut today in observance of Columbus Day, but most businesses and markets remain open; although liquidity will be lower in FX and bonds.
Tuesday
Germany ZEW economic Sentiment. Another dent as this institutional investor survey is expected to fall again for the fourth consecutive month…
US FOMC Member Clarida speaking at event about the economic outlook and monetary policy at an online event hosted by the Institute of International Finance. Could be interesting when Q & A starts.
Wednesday
US CPI / inflation reading. Key release of the week in light of heightened market angst. We already know inflation is at a level that warrants the start of the Fed’s QE tapering. But how high will inflation go?
Bonds very sensitive to a bigger jump than consensus.
US FOMC minutes from September meeting. Investors will be keen to glean any information about the QE tapering that is likely to be announced at the 2/3rd November meeting.
Thursday
US Core PPI – producer Price Index. Measure the costs of good and services going into production. A leading indicator to CPI or inflation.
US Crude oil inventories. Delayed a day due to Columbus Day from Monday
Friday
US Core Retail sales – a pullback from last months, as sales ebb and flow since April.
US Prelim UoM Consumer Sentiment – signs of a modest recovery
So, that’s about it for the week ahead.
I’ll be back in touch with more news and views on trading the markets…
In the meantime, check out our stock market trading webinar.
As we’ve seen, stock markets are showing strength after the tough times in September.
And that means good opportunities for our Momentum Stocks Strategy.
Check out the strategy in our Momentum Stocks session.
Click here to get your FREE place in the webinar.
Regards,
Jerry Miller
Managing Director
Trendsignal
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