Stocks, Treasuries and USD Recover But Sentiment Remains Fragile
US equity markets are currently eyeing a flat open on Thursday, with caution clearly evident as investors recover from Wednesday’s brief sell-off and await the start of earnings season on Friday.
Markets may also be experiencing something of a hangover from Wednesday, when US stocks, Treasuries and the dollar all sold off on reports that China is considering cutting purchases of Treasuries. China is a huge buyer of US debt and so, should the reports turn out to be correct, one would expect yields on US debt to rise, which is why we saw such a knee jerk reaction.
The report was later denied and even labelled fake news by China’s FX regulator, which prompted an unwinding of the earlier moves, although investors appear to have remained on edge. Yields had already been rising in the 24 hours preceding the report after the Bank of Japan bought fewer 10-25 year and 25-40 year JGBs than it had been previously, prompting speculation that monetary stimulus is being withdrawn, despite the central bank having claimed only last month that tightening is not imminent.
There appears to be some jitters in bond markets right now with some people calling the end of the bull market, citing stronger economic growth and central banks unwinding their crisis-era policy measures and raising interest rates. This seems a sensible conclusion under the circumstances and it will be interesting to see how orderly the return to higher yields is. Naturally yesterday’s China story didn’t help calm the situation and I wonder whether the response by the Chinese FX regulator will put the report to bed or if it has further to run.
Will Earnings Season Live Up to High Expectations?
Earnings season should provide a more positive story for markets, with investors optimistic ahead of the fourth quarter results following some very encouraging results last time around. The question now is whether companies can live up to expectations and whether the benefits of tax reform for companies has been accurately priced in.
Bitcoin Slides Again as South Korea Prepares to Ban Cryptocurrency Trading
Bitcoin is having another bad day, trading down around 10% at the time of writing, after reports that South Korea is preparing a bill to ban cryptocurrency trading through exchanges. South Korea is a big market for cryptocurrency trading and so the ban will be a big blow to advocates but concerns likely go beyond this. Should other countries follow South Korea’s lead, it could affect a large part of the cryptocurrency markets and weigh on sentiment towards them.
Source – Thomson Reuters Eikon
Bitcoin is already trading well below the highs it hit in the middle of December when futures were launched on CME and CBOE exchanges and the frenzy was in full swing. With the price having since fallen as low as $11,000, speculators may no longer be quite so confident in its ability to quickly bounce back from any sell-offs, which may explain why it continues to trade so far from its highs. Further difficulties with regulators will not help matters and could prove damaging to the price in the near-term.
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