Spot values at a glance:
Asian equities fell and US stock futures headed lower, extending the biggest selloff for global stocks in 2 years as investors adjusted to a surge in global bond yields. The 10yr Treasury yield neared 2.87% after solid jobs data on Friday showed rising wages. Oil and gold extended declines.
US Reports Solid Nonfarm Payroll Data:
US hiring picked up in January and wages rose at the fastest annual pace since the recession ended, as the economy’s steady move toward full employment extended into 2018. Nonfarm payrolls gained 200,000 in January, more than the median estimate of 180,000, while the prior increase of 148,000 was revised upwards to 160,000.
The jobless rate maintained at 4.1%, matching the lowest level since 2000, while average hourly earnings gained 0.3% from a month ago and 2.9% from a year before, exceeding consensus estimates of 0.2% and 2.6% respectively.
Treasury yields and the US dollar gained, while equities plunged, as the data reinforced the Fed’s outlook for three interest-rate hikes this year under incoming Chairman Jerome Powell, including one that investors expect in March. The figures may also add to the likelihood of a fourth rate increase in 2018, Bloomberg news reported.
Benchmark Treasury Yield Poised to Test Key 3% Level:
The 10yr Treasury yield appears destined to test its key 3% level for the first time since 2014, after breaking above the 2.8% mark with conviction on Friday. Friday’s better-than-expected wage gain numbers, the highest in more than a decade, is adding to bearish speculation as US inflation expectations climb, cementing confidence that the Federal Reserve is on course to raise interest rates at least three times in 2018, if not more.
According to Bloomberg news, market analysts have differing opinions on where the market moves from here. While many have warned that yields above 3% will herald the start of a bond bear marker, others say a sustained move higher from there isn’t a guarantee, especially if stocks continue to fall. As rates rise, equity investors concerned about inflated valuations may rotate into fixed-income assets and boost demand for Treasuries.
Following a break above 3%, yields could rise further, potentially next settling around 3.25%.
How Higher Yields Can Derail a Stock Market Rally:
According to a Bloomberg View article, concern is mounting that the Treasury market’s travails are becoming an inescapable portent for stocks. Selling resumed Sunday night as index futures opened lower, a week after yields on 10yr Treasuries climbed to a 4-year high of 2.84%. Below are some reasons why spiking yields can be adverse for stocks:
- Earnings yield. A major selling point for equities since the financial crisis has been the higher yield of equities versus fixed income, with earnings considered the “yield” of a share of stock. The S&P 500’s annual profits are currently about 4.3% of the index’s price. Generally investors feel safe when that number is comfortably above Treasury rates by about 1.5 percentage points. The rise in bond yields has narrowed the spread to the smallest in 8 years.
- Net present value. To put it simply, today’s value of future earnings goes down as interest rates go up, thus making stocks more overvalued, and the risk-free payout of a bond in, say, a year, becomes more competitive. Once yields rise to a certain level, stock investors begin to get attracted to low-risk bond yields instead of higher-volatility stock investments.
- Servicing debt. Higher rates may raise corporate expenses which includes debt costs, which in turn can shrink net income and compress margins.
- Global end of easy money. The Fed isn’t the only one normalizing policy. The ECB has reduced its monthly asset-purchase target and hasn’t decided whether to extend buying after September. German 10yr bund yields went from 30 to 77 basis points over the past 2 months. The correlation between German and US 10yr notes stands at north of 0.6. Rising yields in Germany has already caused the nation’s benchmark equity index to drop for 7 out of the past 10 weeks. Central banks in Canada and the UK have also indicated hawkish tilts in their policy statements.
Trudeau Threatens to Leave Nafta:
Canadian Prime Minister Justin Trudeau made some of his most aggressive comments to date on dealing with US demands to rework Nafta, adding he still thinks he can get the right deal for his country. “We aren’t going to take any old deal,” Trudeau said Friday. “Canada is willing to walk away from Nafta if the United States proposes a bad deal.”
His comments come after US President Donald Trump threatened to get tough on trade, though he didn’t single out Nafta, in his State of the Union address. The latest round of Nafta talks wrapped up in Montreal on Monday, with all sides saying there had been progress, while acknowledging significant gaps remain on some issues.
USDSGD gained to 1.3200 Friday after a solid jobs report in the US drove the dollar higher.
The key support continues to remain at the psychological 1.3000, while the resistance resides above at 1.3350. Over the longer term, the bias for USDSGD continues to remain to the downside, as indicated by the trend channel in place since the start of 2017.
The SGD has been trading nearer towards the stronger end of its trade weighted basket for several months, with a modest tightening at the April MAS meeting expected.
AUDUSD rebounded off its 0.7900 handle earlier today, and is currently largely unchanged from Friday’s drop. The pair had declined from 0.8100 over its previous two sessions on the back of a USD strength.
The RBA is set to meet for the first time this year and is expected to leave rates unchanged at a record row for an 18th month on Tuesday. According to Bloomberg, money market bets and economists’ forecasts indicate neither see a serious chance of tightening before the fourth quarter.
USDCAD gains to its highest level in more than a week, breaking above the 1.2400 handle after Trudeau threatened last Friday to leave Nafta. However, with the pair remaining under the 1.2450 resistance, the bias continues to remain to the downside for now.
A break below the recent low of 1.2282 is likely to lead to further downside, the next support target residing at 1.2062.
USDCNH maintained just above 6.3000 Monday, amid a stronger US dollar over the weekend and as the PBOC set its daily reference rate lower than expected. USDCNH had previously declined below 6.3000 on Friday, only to reverse course to end the session higher after better-than-expected nonfarm payrolls data.
Policy insiders and analysts said China’s central bank is reasonably comfortable with the yuan’s sharp gains against a dollar that is broadly weakening, but that strength could become an issue if gains against other currencies affect its export competitiveness.
The yen weakened to 110.48 against the dollar last Friday, but pared its decline earlier today, leading USDJPY to slip back below 110. USDJPY remains in a major sideways trend, as it has been the whole of last year, ranging between 108 and 115. The key support remains at 107.50.
GBPUSD lingered near Friday’s lows, as the currency pair’s recent sharp rise shows signs of exhaustion. Sterling bulls may need Bank of England Governor Mark Carney to bring a rate-hike into May this week to drive further appreciation in the currency.
GBPUSD posted its first weekly decline against the dollar since mid-December, weighted by lower-than-forecast UK data and renewed scrutiny on PM May’s future amid Brexit talks. The key support remains at the psychological 1.4000 level.