Morning Note

Stocks recover as US real yields go negative

Morning Note

In the US, bulls defended the herd yesterday as the Dow and S&P 500 stabilised after Wednesday’s bloodbath. The tech stocks were bruised on ongoing China fears, however, leaving the Nasdaq weaker. Weaker members of the herd are being picked off – US small caps fell again leaving the Russell 2000 nearly flat for the year.

It was a different story in Europe, where the major bourses tumbled again – The FTSE 100 took out a 6-month low, not helped by 30pts of ex-divis. But broadly Europe softened as the DAX declined 0.7%.

This was about a flight to high-quality, healthy balance sheet US companies  – Visa, Coca Cola, McDonalds, P&G were among the top risers. Walmart jumped on a thumping earnings beat. Boring helped drag the Dow higher too as it denied a report about delaying delivery of the 777-8.

Investors remain on the defensive but the glut of negative yields on bonds and drop in US yields undoubtedly forces them up the risk curve as they seek returns, offering support to high quality stocks and defensive sectors.

Stocks push higher

Asia has been mixed to a little better overall. Hong Kong and Shanghai higher, Tokyo, Sydney and Seoul down a touch.

Europe has a best foot forward set up with the support of the ECB in focus (see below). European indices bounced a little – on the open stocks were up a touch but as with yesterday we wonder if it can survive as investors seek direction. With the FTSE yesterday holding the 7060 line at stumps, there is hope for bulls that it’s found a bottom for now. We also need to look at the pound strength emerging in the last day or two as a potential drag though. As with all Europe – you have to ask yourself where the drivers of strength lie – valuations only.

Trade – more jawboning: Trump says China wants to do deal, in teeth of retaliation statements from Beijing.

Real yields go negative

Real US yields went negative for the first time since 2016 – a bullish signal for gold. As we indicated in the last two commodity strategy notes on this topic, a drop in real yields into negative territory could send gold to $1600.

The preferred benchmark, 10yr TIPS fell to -0.02% and we are seeing shorter dated real yields also move closer to entering negative territory.

Yields are near the lows but 2s10s is no longer inverted. 10yr at 1.55%.

Falling bond yields is helping gold recover. The drop in US benchmark debt yields and real yields should offer continued support. Moreover the inflation picture is not softening – core CPI looks solid and has moved noticeably higher over the last two months. Real yields look set to continue to decline.

Oil

Oil is failing to hold gains. Having driven to $57.50 WTI has retreated to $55. Brent is now sub $59. Concerns about global growth continue to defy any controlling of output.

Overnight data continues to show contraction in global growth. Singapore exports declined, New Zealand manufacturing contracted for first time in 7 years.

FX

Sterling has stabilised above 1.21. The Remain rebels are girding themselves for the assault. Signs maybe that it may be trickier for Boris to force through no deal.

EURUSD has declined to the 1.10 handle before paring losses to hit 1.110, where it seems to have found support. Rate-setter Oli Rehn says the ECB’s stimulus package coming in September will be a lot more than the market currently anticipates. Whilst we’ve seen the euro move lower on this, it’s not exactly tumbling, highlighting the kind of expectations that already exist. The market already expects the ECB to move mountains to get the phlegmatic, sclerotic Eurozone economy moving. There are also questions over whether the ECB even has the firepower to achieve much now – more a peashooter than a bazooka, is the market fear. Hence why European indices are not exactly rallying hard on this.

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