As the three wise markets follow their star across the world, the bond market leads, the FX market follows and the equity market decides. This morning, Mr Bond is nervous of the tighter monetary conditions that have come about as rates, yields and the dollar rise in tandem.
While the bond sell-off was fuelled by stale longs, speculative shorts have now increased dramatically, so nerves aren’t surprising. The dollar is acting as a brake on the extent of Fed tightening and the extent of the bond sell-off. Mr Forex is hyper-sensitive to these bouts of self-doubt by Mr Bond and the dollar has backed off a little on this Monday morning. Mr Equity will decide where we go, because if his nerve doesn’t fail and share prices continue on their march higher, the bond market will learn to live with a stronger dollar and yields will also go higher. And which point the sensitive Mr Forex will simply tag along and drive the dollar higher. That seems the most likely outcome – a bit of self-doubt assuaged by a push to SPX 2300 once the equity market has digested both recent gains and some of the weekend’s mince pies.
Last week’s CFTC data show a second week of shorts building in USD/JPY. Not extreme by any stretch of the imagination, indeed we’re at less than half the biggest short of the last 3 years, but enough for this morning’s correction. I’d guessing that, with relative real yields now higher than at this time last year, the corrections stalls between here and USD/JPY 115.
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CFTC data showed, on the other hand, that net shorts in GBP and EUR were still being pared back. The overall dollar position isn’t extreme, and yield differentials are providing little reason to look for any notable bounce for either yen Euro or sterling. We get IFO data in Germany and a speech by Jens Weidmann, but I doubt that will have much market impact. The big drivers from here are likely to be yields (dollar positive) and politics. Nothing new on that front in Europe, but a ‘week of discontent’ in the UK sees more strike action. I’m flying n and out of three different UK airports this week, so I’ll be paying attention to labour relations. But I’ll also be short GBP/USD on the grounds that none of this helps the economic outlook at all.
The US has Markit services PMI data today, existing home sales on Wednesday, durable goods Thursday and new home sales on Friday. Sweden’s Riksbank meets Wednesday. Canada has CPI on Thursday.
