US equities higher, bond yields continue to rise, commodities lower, RBA statement at 11:30am, ASX futures down 8 points

US equities rose around half a percent last night, and it looks as though the momentum of selling on the ASX 200 is slowing - but don't go banking on a bounce. 10-year Australian government bond yields continued to climb yesterday and are now 64 basis points higher than they were one month ago, a move from 2.35% to 2.99%. 10-year yields are not the only ones rising: 2s, 5s, 10s and 15 year bond yields are all higher, particularly after this weeks paradigm shift from Australia as an economy with loosening money supply to one that has possibly reached its cash rate lows. It's not just Australia that is in this position, US, UK and German bond markets are all selling off, which has pushed yields higher and is having the effect of tightening credit as the cost of borrowing across the yield curve increases. These moves could mark the beginning of a fundamental shift in markets and thus rather than seeing equities retrace an isolated sell-off, we could see stocks behave a little defensively has they sit and wait to see whether bond yields are trending higher or are just temporarily higher.

To give you an idea of what prompts me to say that this is potentially a paradigm shift (from a falling interest rate environment to a rising one), have a look at today's first chart, which shows the yield on an Australian 10-year government bond. It shows a swift rise in yields over the last month and looks like traders in these markets are scrambling to get ahead of a larger move - the strength of the April/May rally shows us that. Should you be worried about this? No, you should never worry, you should simply prepare for various outcomes and the associated actions that might be required depending on what materialises. Australia is on the cusp of what is looking like a relatively kind 2015 Federal Budget, meaning that the incumbent government has come to terms with the fact that now is not the time to (seriously) tackle debt. So increases in our national debt will continue to keep pressure on the Reserve Bank to keep rates low for a long time - otherwise the government's interest bills will make it all the more hard to dig itself out of debt. This means the short-maturity alternatives that are able to fight for big investment dollars (chiefly Australian superannuation assets) aren't set to look terribly attractive for some time, and this means equity markets will remain attractive on relative terms. Short-term debt (less than 12 months) will continue to be driven by the central bank, and 2-15 year bonds may not provide an attractive profile to superannuation investors due to the longer maturities.

Notwithstanding all of that, let's just punctuate that this move in bond markets is a driver of equity market adjustments and assume that selling pressure and volatility will remain around at least until the trending moves in bond yields stabilise.

Today's three Rivkin Trader charts show:

  1. The ASX 200 continuing to struggle with this week's negative equity sentiment shift 
  2. The US dollar index reversing some of its recent weakness last night
  3. The Aussie dollar responding to short-term US dollar strength, levelling back off to US$0.79
Traders please take caution this morning: The RBA will release its statement on monetary policy at 11:30am this morning, and volatility will surely ensue. Why? Part of the market is surely expecting Glenn Stevens to moderate the Bank's language with regard to further cuts being off the table. Irrespective of whether rate expectations are massaged or whether they're left as they were following the rate cut announcement on Tuesday, the AUDUSD and ASX 200 will experience volatility at around this time.


Today‚Äôs charts are taken from the Rivkin Trader platform. 30,000 global instruments available to trade including FX, commodities, index, ETFs and international shares. Trade Australian share CFDs from just $8 or 0.10%. Click here or phone 1300 748 546 to open a Rivkin Trader account now.

Upcoming economic announcements: RBA monetary policy statement at 11:30am, UK trade balance at 6:30pm, Canadian employment report at 10:30pm, US employment data out at 10:30pm, all Sydney time.


This article was written by Scott Schuberg, CEO of Rivkin Securities Pty Ltd. Enquiries can be made via info@rivkin.com.au or by phoning +612 8302 3600.

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