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The bond market wakes up. US 10-year yields hit the highest since Aug 13

  
  Analysis
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Taper back on the table?

Taper back on the table?
There’s a sweet spot for many markets where delta pushed back the taper but the economy remains solid and rates stay low.
Of course, that’s an impossible paradigm to hold. Yes, Powell probably won’t signal a taper this week but beyond that either delta will meaningfully hurt the global economy or delta will fade and the case for tapering will return.
At the moment, the bond market appears to be hinting at a fade in delta and rising odds of a September taper. Overall, I suspect this is more about delta and confidence this round of cases will fade quickly but I see the Fed argument too.
From where I stand, Powell’s best course of action is to preserve some optionality into the Sept meeting but emphasize that the Fed will do everything it can to support the recovery. Ultimately, a November taper hint and December announcement makes the most sense.
Despite the uptick in rates, the bond market certainly isn’t seeing any inflation.

US stocks close session with mixed results

  
Analysis, US Market
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Dow Jones, S&P give up gains and close in the red. NASDAQ closed mostly higher

The US stock market lost steam into the close with Dow industrial average and the S&P 500 closing in the red and giving up earlier gains. The NASDAQ index squeaked out a small gain on the day.

The final numbers are showing:
  • Dow industrial average -97.11 points or -0.28% at 34838.36
  • S&P index -8.11 points or -0.18% at 4387.15
  • NASDAQ index rose 8.39 points or 0.06% at 14681.07
  • Russell 2000 index fell -10.75 points or -0.48% at 2215.50
As the day went by, lower yields on the back of expectations of slower growth due to the Covid Delta variant, started to weigh on the major indices.  The Dow industrial average was up as much as 256.64 points. The S&P index was up as much as 25.64 points and the NASDAQ index is up as much as 97.7 points before reversing back to the downside and closing near the lows for the day.

Eurostoxx futures +0.7% in early European trading

  
Analysis, Global Indices
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Some catch up play for Europe going into the open

  • German DAX futures +1.1%
  • UK FTSE futures +0.6%
  • Spanish IBEX futures +0.6%
After the more upbeat mood in US equities yesterday, European indices have some catching up to do following the Easter break since last Friday.
The early gains belie the more measured risk mood so far today though, with US futures pulling back slightly after yesterday’s stellar advance. S&P 500 futures and Dow futures are down 0.2% while Nasdaq futures are keeping flatter with Treasury yields a touch lower.
That is keeping the dollar steadier and major currencies little changed so far on the day.

Bond’s send out a distress signal

  
  Analysis
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All is not well-

The constant fall in Bond yields is sending out a signal that all is not well in the world. The tail end of last week may have seen some excellent earnings from facebook, apple, amazon and alphabet and that started a fresh equity rally early Friday. However, the fall of Bond yields is saying, ‘look out! There may be trouble ahead. For the uninitiated bond traders tend to take a more long tern macro view. So, when equities rise, but bond yields are falling that is a signal something is wrong.

If you can recall at the start of the year one of the big questions was which market is right? Falling and yields or rising equities? The answer has been, ‘the falling bond yield market’. So, the general rule of thumb is go with the bond yield market. Now, of course this doesn’t mean that a funny divergence can last for weeks and months. However, at the very least it is a warning sign. That warning sign is showing again.

All is not well- 

Yields are dropping

The 10Y Gilt yield (UK bond) hit a record low last week. The 10Y Bund (German bond) closed at its lowest level since mid-May on Thursday last week, while the 10 y UST (US bond) was down towards its lowest ever close last week too.

Bonds

SP500

Why are they dropping?

The proverbial tea leaves are being read and a second wave of COVID-19 is being seen ahead. This will mean more monetary and fiscal policy help to get through the pandemic.So, yes the equity market has been rallying on the central bank support. However, the bond market is saying that the next stage of the global economy is fraught with dangers and a ‘V’ shaped recovery is more hope than reality.

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