The Overnight Report: More Bond Panic

This story features BHP GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: BHP

By Greg Peel

The Dow closed down 36 points or 0.2% while the S&P lost 0.3% to 2099 and the Nasdaq fell 0.4%.

As You Were

Well so much for having a “quiet” session ahead of the budget. Yesterday’s 0.9% rally was driven by another jump in iron ore prices and further announced cost cuts from BHP Billiton ((BHP)), sending the materials sector up 1.7%, a positive investor day presentation from Qantas ((QAN)), which helped industrials up 1.0%, and sudden renewed buying in yield stocks, for reasons that are not apparent.

The banks managed a 0.8% gain despite a 1.9% fall in a reopened National Bank ((NAB)), adjusting for the capital raising but liking it nonetheless, while the telco came back 0.9% and the supermarkets, which were trounced on Monday, rebounded 1.4%.

Perhaps Joe’s economic growth forecasts were leaked. By Disneyland.

Budgets tend to have little impact on the stock market other than briefly, unless there is a big change in policy impacting on a particular sector or company. There was nothing announced last night that’s going to move the general market dial.

The bad news is that the Aussie spent all night rallying, perhaps because one could almost call last night’s budget stimulatory, thus moving in concert with monetary policy, as opposed to last year’s disaster that intended to tighten fiscal policy in opposition to the RBA’s efforts. But the US dollar index is also down 0.5% to 94.57, helping the Aussie up 1.1% to US$0.7976.

Buddy can you spare a dime?

Joe might have been railing last night that Australia’s government debt costs about a hundred million a day in interest payments, thanks to the other mob yada yada yada, but spare a thought for Greece. According to reports, Monday night’s last minute E750m payment to the IMF has left a total of E90m in the bank. That’s it.

If Greece does not receive the next tranche of its bail-out package pretty much immediately it will go under, default, and possibly exit, either by walking out the eurozone door or being thrown out. The Greek government has indicated it wants to stay in, but has refused to bow to its creditors’ austerity demands.

And so it goes on.

The newly re-elected UK chancellor was over in Brussels last night talking tough on Greece and on the EU in general, warning that the Tory’s intended referendum on remaining in the EU will go ahead unless reforms can be made. So we may yet see a Grexit from the eurozone or a Brexit from the EU, or both.

Bond Panic

Historically low interest rates across the globe have led to a huge surge in corporate bond issuance as companies exploit once in a lifetime cheap funding, often only to buy back their own equity. But there is only so much corporate debt the market can take on before the boat threatens to sink. While Greek fears linger, sending the German DAX down 1.7% last night, a wider sense of timid optimism with regard the eurozone economy is bringing in question just why German bonds need to be as cheap as they are.

Which is why German yields have been rapidly rebounding the past couple of weeks, as investors rush to sell. The impact has flowed across the pond, where a break of technical levels has sent the US ten-year yield surging back as well. Last night the US yield leapt to a six-month high 2.36% early in the session before settling all the way back to 2.26%, down one basis point on the day.

The flighty bond market is giving Wall Street the willies, which is why the Dow was down 180 points last night as bond yields hit their intraday peaks. As yields settled back, so did the stock indices rise back once more to a less intimidating close. All was forgiven, but it does beg the question of what will actually happen when the Fed finally does raise its cash rate.

Well Oiled

Last night the US Energy Information Administration forecast that output from seven major US shale players will fall by 86,000 barrels per day in June. Throw in analyst expectations that tonight’s weekly US crude inventory numbers will see another drop, and renewed air strikes in Yemen, and West Texas crude jumped US$2.03 to US$61.27/bbl and Brent jumped US$2.41 to US$67.47/bbl.

The weaker greenback also helped commodity prices higher, particularly on the LME. Base metal traders were also squaring up in case today’s raft of Chinese data indicate Beijing’s earlier stimulus measures are beginning to gain some traction. All metals were stronger, including 2% gains for lead and zinc.

The iron ore price has slipped a tad, down US20c to US$62.30/t.

The weaker greenback also kicked gold up US$9.30 to US$1193.00/oz.

Today

The SPI Overnight closed down 16 points or 0.3%.

The aforementioned Chinese data include April industrial production, retail sales and fixed asset investment numbers.

Locally, the March quarter wage price index release will provide indication as to whether the RBA has anything to worry about on the inflation front.

The eurozone will release its first estimate of March quarter GDP tonight. In the US, retail sales will be in focus.

On the local stock front, Westpac ((WBC)) will go ex-div today, handicapping the index from the open.

Rudi will appear, as a guest, on Sky Business' Market Moves today, 5.30-6pm and then as host on Your Money, Your Call Equities, 8-9pm.
 

All overnight and intraday prices, average prices, currency conversions and charts for stock indices, currencies, commodities, bonds, VIX and more available in the FNArena Cockpit.  Click here. (Subscribers can access prices in the Cockpit.)

(Readers should note that all commentary, observations, names and calculations are provided for informative and educational purposes only. Investors should always consult with their licensed investment advisor first, before making any decisions. All views expressed are the author's and not by association FNArena's – see disclaimer on the website)

All paying members at FNArena are being reminded they can set an email alert specifically for The Overnight Report. Go to Portfolio and Alerts in the Cockpit and tick the box in front of The Overnight Report. You will receive an email alert every time a new Overnight Report has been published on the website.

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided. www.fnarena.com

Click to view our Glossary of Financial Terms