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Equity markets react to rising yields by trimming prices. Higher inflation and a Fed hike drive a changed sentiment. Asset prices to adjust lower

Bonds
Equity markets react to rising yields by trimming prices. Higher inflation and a Fed hike drive a changed sentiment. Asset prices to adjust lower

By Jason Wong

Global bond yields are generally higher, with the US 10-year rate up 3 bps to 1.79% and UK and Germany rates up 6 bps each to 1.15% and 0.08% respectively.

In the UK, the bond market sell-off is likely a delayed reaction to the BoE’s Carney’s comments reported yesterday, which reduce the chance of further easing.

For Europe, Reuters reported that the ECB is almost certain to keep buying bonds after March with programme rule changes under consideration.  There’s not a lot of news in that comment, as it says nothing about whether or not bond purchases will be “tapered” beyond March, which is what the market is most sensitive to.

Global equity markets are down slightly, with US equities not helped by a fall in Apple shares after its underwhelming earnings report after the close yesterday.  In the equities space the more interesting move was a chunky 1.5% fall in the NZX-50 Index, taking the cumulative fall since the market peak on 7 September to 8.9%.  Putting the daily movement into perspective, it was the fourth largest drop over the past five years.  The downward trend of late in NZ equities is another indicator of the shift in investor sentiment – away from “yield”, given the prospect of rising inflation (supported by higher oil prices) and the Fed being on the verge of delivering another rate hike, most likely in December.

In local trading yesterday, we saw further flattening in the swap curve, with the 2-year rate up 2 bps to 2.12% and the 10-year rate down 0.5 bp to 2.72%.

The short end of the curve likely saw some spillover from higher Australian rates, following the CPI release. The average increase in the weighted median and trimmed mean figures was slightly softer than the market expected and the annual increase of 1.5% y/y was the lowest recorded since inflation targeting began.  Nevertheless, annual headline inflation rose to 1.3% y/y, 0.2 percentage points higher than consensus and this was seen to help lift inflation expectations going forward.  Thus, the OIS market reduced the chance of a 25bps rate cut by the RBA next month from 15% to 6%.

The trading day ahead should be fairly quiet, with NZ trade data of little interest to most.

Overnight sees the release of UK GDP data and US durable goods orders.

Daily swap rates

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Source: NZFMA
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Source: NZFMA
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Source: NZFMA
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Source: NZFMA
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Jason Wong is on the BNZ Research team. All its research is available here.

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