Global Markets Overview – 3/21/14

Bond rates appealing to yield hunters

As commentators continue to debate the fall-out from Yellen's first run as chair after quantifying 'a considerable amount of time' as around six months. The markets have moved on from the press conference by completely erasing all losses from her speech.

The reversal in equity markets was due to better-than-expected data from the Philly Fed manufacturing survey that moved through 15 points from -6.3 to +9 and showed that East coast manufacturing is still on the way up, as initial jobless claims remained near four-month lows as only 320,000 claims where lodged last week below the 325,000 consensus figure.

The data does lend itself to Yellen's testimony that most of the harsh US winter data will filter out in Q2, and spring is likely to yield better conditions that are more conducive to economic growth. However, not all markets regained composure after the rout that was seen yesterday.

Bond markets continued to slide as two-year and five-year treasuries continued to fall. Two-year bonds are now at their lowest read since 2011, with a yield of 0.44%. The ten- to 30-year curve has also narrowed to 2010 levels, as bond traders start to reposition themselves for the real prospect of rate rises to the Fed funds rate.

The change in economic projections from the Fed is a wake-up call to yield hunters who have piled into high-yielding equities over the past four years; repositioning is coming. If rates rise start to be priced into bond markets over the coming months, the attractive rate of return from an income side for lower risk is likely to see equity positions coming under pressure and therefore an unwind in this trade.

This could spell trouble for the financial service sector, consumer staples and telecommunications plays that have been heavily bid up on the income stream offered. This won't happen immediately, but on the first initiation of a rate rise by the fed US treasuries and USDs will become highly attractive to yield hunters and will see equity markets slide.

Fund flows into the US look to be gaining traction as the USD continues to find strength as the dollar index moved by 1% in the last 48 hours. This occurred as an additional 0.2% was added overnight to the 0.8% on Thursday, which was the largest single move since August last year. The risk pairs are seeing the most sustained selling pressure as the EUR dropped to $1.3776 having touched $1.40 only seven days ago.

Ahead of the Australian open

Gold continues its march lower having now lost 4% in the past three days as the bear reverse gains momentum and USD strength sees the safe metal losing its shine. Gold plays saw heavy selling yesterday and this is likely to continue today while will dragging slight on what should be a positive end to the week.

We are currently calling the market up 21 points on the 10am bell (AEDT) to 5315; as we see a recovery from yesterday, will little macro data around, intraday trading is likely to be subdued after the initial jump on the open.

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