Generally global stocks have had a strong start to the second quarter of the year with perceived progress around US /China trade talks and markets expecting a positive resolution. So much so, the US S&P 500 this week hit its highest level since October.
All eyes however will be on today’s Non-Farm Payroll data release.This is the most important monthly global economic indicator for financial markets since it represents the number of industrial (non-farming …as agricultural employment has very seasonal hiring patterns) jobs created in a month in the US; the world’s largest economy. A consensus forecast of Wall Street economists expect the U.S. economy to have added 175,000 non-farm payrolls in March.
On any NFP release – if the number is stronger than expected, both bond and equity markets will fall as a strong NFP will imply a strong US economy and the prospect of higher interest rates. Higher rates are bad for bond prices as rising rates/yields send bond prices lower due to the inverse price/yield relationship. Higher interest rates are also bad for equities as:
- It raises the cost of borrowing for companies.
- It makes higher bond yields relatively more attractive as a investment option for investors.
Although stocks are performing reasonably well right now the stability seems fragile.Indeed, we have had a huge rally in government bond yields this year reflecting deep anxiety about the health of the global economy.
Benchmark 10-year government bond yields in the US sank from 2.70% at the end of last year to as low as 2.34% last week – reflecting rising bond prices – as investors responded to increasingly cautious signals from the Federal Reserve and other main central banks.
More than $10 Trillion of bonds show negative yields around the world as we are threatened with deflationary times with:
- 10-year Japanese Govt Bonds yielding -0.08%
- 10-year German Govt Bonds yielding -0.03%
Why buy a bond with a negative yield?
- Safety of your investment rather than return is your primary concern
- Bond Fund Managers can only buy bonds!
Commodities – Oil
Continuing the rally that has built up since the start of the month, Brent Oil is flirting with $70-a-barrel as a combination of economic sanctions (against oil producers Venezuela and Iran) and OPEC cuts in production has pushed up prices.
Brexit – with the pound relatively stable/strong e.g. GBP/USD 1.3150…that exchange rate is telling us there WILL be a Brexit deal and an orderly withdrawal from the EU. If the market thought there was a significant ‘no deal’ risk that exchange rate would be a lot lower.
S&P 500: 2870
FTSE 100: 7400
Bonds – 10 Year Government Yields
EUR/USD 1.1200 (1 euro buys 1.1400 dollars)
GBP/USD 1.3100 (1 pound buys 1.3200 dollars)
OIL: Brent: 70.00 (dollars per barrel)
GOLD: 1300 (dollars per ounce)
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