The meltup continues: European stocks edged higher as Asian shares traded mixed, while U.S. equity-index futures point another open in record territory. But today's story may not be stocks, but rather rates as U.S. bonds extended the Wednesday selloff with the 10-year Treasury yield climbing above 2.6% for the first time since March to help the dollar hold Wednesday's gain.
The latest catalyst for the ongoing selling in the rates complex was China, and specifically the barrage of Chinese data reported overnight. For the better part of the past decade, “bad news was good news” for stocks as it meant more central bank support. Now, good news is even better news – at least until central banks realize they can't withdraw, and the push into new record highs across global risk assets overnight is being attributed to the latest set of stronger than expected Chinese economic data released overnight, which beat across the board with the exception of retail sales.
China GDP YoY BEAT: +6.8% vs +6.7% exp (+6.8% prior)
China Industrial Production YoY BEAT: +6.2% vs +6.1% exp (+6.1% prior)
China Retail Sales YoY MISS: +9.4% vs +10.2%% exp (+10.2% prior) – lowest since Feb 04
China Fixed Assets Investment YoY BEAT +7.2% vs +7.1% exp (+7.2% prior)
However, reported overnight, despite the occasional blip the trend remains all too clear.
As a result, and as Bloomberg confirms, the Treasury curve is in focus as 10Y yield breaks above the key 260bps level – which Jeff Gundlach last week dubbed as a red line for not only an accelerated selloff but the level above which it will start hurting equities – leading curve steeper as apple repatriation announcement remains in focus with speculation the firm may have to sell some Treasuries to pay the tax liability.
Treasuries also retreated amid hopes that U.S. lawmakers will strike a deal to avert a government shutdown before temporary funding runs out on Friday, after Chief of Staff Kelly said the GOP has the needed votes to pass the stopgap bill. China's better-than-expected data only added to the narrative of synchronized expansion, which – alongside upbeat profit expectations – could mean the bull run in stocks going until 2019 or beyond, according to a Bank of America survey of fund managers.
In response to the push higher in US yields, Germany's 10-year bond yield, the benchmark for the region, was near a 5-1/2 month top at 0.52%.
Away from the bond reaction, most Asian equity bourses were closing when the Chinese data landed but had briefly set a new an all-time record after the U.S. bluechip Dow Jones Industrial index had closed above 26,000 points for the first time.Australia's ASX 200 (Unch.) and Nikkei 225 (-0.7%) both gained at the open in which the Japanese benchmark briefly rose above the 24000 level for the first time in around 27 years, although both then pared gains with Japanese stocks sliding into the close, while commodity-related stocks in Australia were dampened by disappointing production updates from Whitehaven Coal and Woodside Petroleum. Elsewhere, Hang Seng (-0.1%) and Shanghai Comp. (+0.5%) were varied in anticipation of tier-1 China data releases including GDP in which officials including Premier Li had suggested the economy grew 6.9% for 2017. China's yuan finished at its highest since December 2015.
Europe's main FTSE, Dax and CAC40 stock markets then ticked higher though moves were choppy in the cross currents of rising euro and bond yields. The euro strengthened while European stocks were mixed, with the technology sector lifted by Infineon (+4.5%) after upgrade by Goldman. The FTSE 100 was struggling thus with the index dragged down by the likes of Whitbread after a soft earnings report
“The likelihood we have higher inflation data in the big economies is well over 50 percent so that is the next turning point for the markets,” SEB investment management's global head of asset allocation Hans Peterson told Reuters. He added there were now two big questions. How will central banks respond and will the rise in bond yields happen at such a pace that it impacts optimism around assets like equities?
“We are going to change the regime probably within the next 2-3 months,” he said. “Will it be accompanied by rising producer prices then we can live with higher bond yields, otherwise it is a problem for us.”
In FX, the break higher in U.S. yields, supposedly launched by news of Apple's cash repatriation even if as Morgan Stanley explained the market reaction was wrong, helped the dollar rise from a three-year low hit earlier in the day in Asia. The euro last stood nearly 1.225 but below a peak of $1.2323 set on Wednesday, the euro's strongest level since December 2014.
A number of top ECB policymakers were due to speak in Frankfurt. Some may have been caught off guard by the speed of the euro's appreciation, said Lee Jin Yang, macro research analyst for Aberdeen Standard Investments in Singapore. “Maybe they are trying to manage volatility or slow down the rise,” Lee said referring to Austria's Ewald Nowotny who told reporters on Wednesday that the euro's recent strength against the dollar was “not helpful.”
Emerging markets were gearing up meanwhile for a number of key interest rate meetings including in Turkey where last year's 18 percent slump in the lira versus the euro has got inflation back in double digits. South Africa's central bank also meets. After being sickly for much of 2017, a sounder political backdrop has seen the rand surge. ZAR is one of the best performing currencies in the world so far this year, fuelling talk of a possible rate cut.
“The South Africa meeting is the big show today. People are in it, they want to like it they want to own it,” said UBP's EM macro and FX strategist Koon Chow. “So any dovishness or a cut would be another trigger for another leg higher.”
