I’m all about that yield, ’bout that yield

My “base” case in 2020 is that all it’s all about that yield, in this bass case, the US 10-year yield. The trajectory of the US benchmark, the risk-free rate of return for CFO’s and finance professors all over the world, intrinsically flows into every corner of the financial world. The world would be so NPV without.

After rising last week in the face of some heavy-duty bond issuance, the US 10-year yield has resumed its downward trajectory, falling four basis points yesterday. Readers should be under no illusion that the Federal Reserve stands ready to make sure that any upward spikes remain just that, upward spikes of a very temporary nature. The move down last night was helped along by uninspiring the New York Empire State Manufacturing Index, which sank to 3.7 in August. That was much lower than the 15.0 print expected, and an asinine performance versus the July print of 17.20.

The Empire data was enough to take the heat out of Wall Street indices, with the S&P 500 and Nasdaq nibbling at new all-time highs. It does seem like a mere delay to the inevitable, though, as the fear of a prolonged rise in US yields fades as quickly as it began.

The fall in the 10-year yield was seen everywhere, though, notably in currency markets and precious metals. The US dollar resumed its downward spiral, and the FOMO gnomes rushed back into the long gold and silver trade, and rightly so.

In Canada, the finance minister resigned to try and get elected as the head of the OECD, while denying it had nothing to do with a charity scandal associated with both him and the Canadian prime minister. We believe you, mate. Markets completely ignored the news, though, with the Canadian dollar one of the standout performers overnight, with the charts suggesting more strength lies ahead.

The US government announced more Huawei bashing overnight, which may have played a part in some hesitancy at the highs for Wall Street overnight as well. The US government added 38 Huawei affiliates in 21 countries to its blacklist. The fallout from this move appears to have struck Asia more heavily than Wall Street today.

The Reserve Bank of Australia minutes were released this morning, with the RBA saying that it stands ready to keep monetary policy loose for as long as it takes, noting that Australia’s downturn was shallower than expected. It also pointed out, however, that its recovery will be slower than expected with the country’s borders remaining shut until mid-2021. That took the shine of the Australian dollar’s rally overnight, although it remains poised to break monthly resistance shortly.

China also launched an anti-dumping probe on Australian wine today, which has probably had a more dampening effect on Australian stock markets then the RBA minutes. I hadn’t realised that Australian wine producers were squeezing out Chinese ones in a country of 1.4 billion people. It must be a lot of wine (for the record, I’ve tried a couple of Chinese ones, and they weren’t bad at all). More likely, the Chinese steps are the latest in some not so subtle retaliatory actions as relations continue to deteriorate between the two countries.

In New Zealand, ANZ Bank has forecast that the RBNZ will cut rates to negative in 2021. That follows the same pronouncement by ASB yesterday. Two of four of the major trading banks have now shifted their position, and it is worth paying attention. The New Zealand dollar has been a notable underperformer recently, on an uber-dovish RBNZ, Covid-19, and now the threat of negative rates. Remember, it’s all about the yield; in this case, the differential.

The virtual Democratic Party Convention appears to be passing without incident. US markets seem to be getting more comfortable with the possibility of a Democratic President. Yes, taxes will rise, but corporate tax will not return to pre-Trump levels. That threat has been balanced by plans to turn on the infra-structure spending spigots which will benefit American companies that make “stuff” as opposed to selling advertising on a computer screen. Biden’s intention to go big on renewable energy may yet come back to bite him in the battery, though. President Trump will undoubtedly make hay amongst the wells in key oil states.

In Asia today, Indonesia releases its July trade balance data at 1200 SGT. In US dollar terms, the trade balance is expected to shrink to $700 million. South-East Asia’s largest economy remains mired in a Covid-19 slowdown, with new infections here in Jakarta (where the author sits) and across the country stubbornly high. Indonesia is also paying the price for the central bank’s “burden-sharing” of a government bond issue earlier this year (read direct central bank monetisation).

The Indonesian rupiah has been the standout regional underperformer, and I feel it is unlikely that Indonesia will get on top of Covid-19 until a vaccine is available. The trade data, if weak, could lead to further pressure on the currency, with the Bank of Indonesia having to yet again, aggressively intervene in the market.

Tonight’s US Redbook Index and US Housing Starts take on greater importance than usual, after the uninspiring regional manufacturing data overnight. That is because the US dollar is at its lows across the board, and US stock markets are at, or near, their highs, across the board. Poor numbers should see that all-important US 10-year yield move lower again, kneecapping the US dollar, while potentially sending equity indices to new highs. In a zero-percent world, it’s all about that yield, ’bout that yield differential.

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Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was OANDA’s Senior Market Analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes.

He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays.

A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV and Channel News Asia as well as in leading print publications such as The New York Times and The Wall Street Journal, among others.

He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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