Financial markets are continuing in the path they've taken the past few days with US yields and the dollar still climbing, equities suffering and emerging markets looking like they're heading for trouble.
"The key events across markets was the US bond yields breaking higher, with the 10-year benchmark closing near 3.09%. One wonders if this is bad for the dollar in the longer run but for now the focus is on the advantage to the US in terms of yield advantage," says John J Hardy, Saxo’s Head of Forex Strategy.
For the moment though, he adds, this is very bad for emerging markets, given the greenback's status as the world's reserve currency. "When the US dollar goes up and when US yields go up too all of this EM exposure to dollar-denominated debt puts a lot of focus on these countries," Hardy says. The Turkish lira is especially exposed to systemic risk and the lira is plumbing new lows ahead of the June election there.
Meanwhile, Japan's GDP was very disappointing with "unbelievable nominal growth at a negative 0.4% QoQ" Hardy says. This economic contraction, he adds "will keep the Bank of Japan away from any move on policy," he adds.
A side effect of the dollar/US yield developments is that equities are "stuck in the mud", reports Peter Garnry, Saxo’s Head of Equity Strategy. The S&P futures index, for example, met pretty hard resistance and has been selling off since. Other hurdles for equities include North Korea's cancellation of scheduled talks with its southern neighbour and some fresh and disappointing macro news out of Europe.
Finally today, Althea Spinozzi, from Saxo’s bond trading desk, notes that the US 10-year yield was very close yesterday to 3.10%, with its highest intraday being 3.09%. "The US 30-yr to 2-yr spread widened up a little but we're nowhere near a steeper curve," she adds. In Europe, these's pain for the price of sovereigns too because of that fresh evidence of that the economy is slowing.
2024: The wasted year
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
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