Macro: Sandcastle economics
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'The US 10-year yield is absolutely critical – watch it'
Clare MacCarthy
Senior Editor, Saxo Bank
The US dollar has pounded higher again on the back of President Trump's apparent climb-down on China trade as well as rising US bond yields. This is bad news for equities, especially those in emerging markets, and it's also bad for EM currencies – especially in Argentina and Turkey. In contrast, crude oil has tracked higher again as yesterday's carnage in Gaza heightened tensions across the Middle East.
For markets, though, the preeminent issue right now is the 10-year US bond yield which has surpassed 3% and will likely head higher still. "This is only the third time this cycle that this has happened and the reason it is significant is that if we get beyond 3.05% it'll be the first six-year high in this benchmark since 1981. And if you look at the chart it seems to me like we're going to probe significantly higher here and that would generally support the dollar if that move extends," says John Hardy, Saxo’s head of forex strategy.
Emerging markets, which carry USD-denominated debt, are taking the biggest hit on this, with Argentina and Turkey especially exposed because of various country-specific political factors. But generally, this higher yield/higher dollar scenario is making itself felt across all markets. "The 10-year yield level is absolutely critical and all traders – regardless of asset class – should keep their eyes on it," Hardy says.
US 10-year benchmark looks ready to punch through this time...
Meanwhile, equities are being hurt by the strong dollar and the surging 10-year yields, as well as the strong oil price and increased geopolitical risk, says Peter Garnry, Saxo’s Head of Equity Strategy. Today's ZEW survey expectations is the key data for equities today, bearing in mind that the last print was a very disappointing -8.2.
Finally today, the crude oil rally has resumed on the back of Middle East tensions and a Saudi desire for $80/barrel, says Ole Hansen, Saxo’s head of commodity strategy. "The clashes in Gaza worsened market sentiment about geopolitical risks in the Middle East. Moreover, Saudi Arabia’s focus seems to have shifted towards the desire for higher prices than a balanced market," says Hansen.
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