Asset Allocation shift drives stocks and bonds. Forex traders ignore it

Risk on, Risk off – it’s a meme that gets overplayed way to much in morning notes and overnight summaries.

But this morning when I look at what happened in bond and stock markets and within bond markets in specific countries it is clear that there was a shift in risk appetite last night. How long it last is of course open to conjecture but one of the weird things about market psychology is that it can ignore reality, or its perception of it, for ages and then, with the flick of a switch everyone is concerned.

Which is where we find things this morning. Indeed, last night one of Wall Street’s bulls Jeffrey Saut from Raymond James made a “call” for a pullback to begin “in mid-July or early August” of between 10-12%.

But of course our readers here knew this sell off was coming because talked about it yesterday and my feeling remains that a move on the S&P 500 futures into the 1945/50 region as noted yesterday is a minimum. Then we’ll see how the support stacks up.



At the close then, the Dow had lost 117 points or 0.69% to 16,907. The Nasdaq dropped 1.36% to 4,391 and the S&P 500 was 14 points or 0.69% lower to 1,964.

Had it not been a “risk” or asset allocation shift there is little chance that bonds would have rallied given the fact that the JOLTS (Job Openings and Labour Turnover) survey surged to 4.635 million in May, not dipped to 4.35 million as expected. That might have added some weight to stocks as the taper continues and the time to raise rates closes in.

In Europe, the FTSE was down 1.25% as industrial production missed by a mile, printing -1.3% against expectations of +0.4% in May. German trade data was a worry also both for Europe’s biggest economy and that of its neighbours, with both exports and imports down 1.1% and 3.4% respectively.

So the DAX was down 1.34%, the CAC fell 1.42% and suggesting, once again, this was an asset allocation play was the fact that the periphery got smashed. Stocks in Milan were down 2.69% while stocks in Madrid dropped 1.83%.

Understandably, futures traders on the ASX overnight have taken the SPI 200 September contract down 24 points to 5448 bid.

Turning to bond markets and there is more evidence of risk allocation, with rallies in core markets like the US, Germany and UK but some selling pressure in Italian and Spanish bonds. US 10s closed at 2.56% for a gain of 5 points or a massive 2.07% capital gain for the bulls. Bunds fell 4 points to 1.22% and in the UK, the big IP miss drove rates on 10-year Gilts down 8 points to 2.65%.

Currency traders seemed to view a different set of data and market moves. While I can make sense of the Aussie’s rally back to 94 cents, euro’s push a little higher to 1.3611 and sterling’s rebound back to 1.7129 after the weak data is somewhat less easy to fathom. The US economy is looking better but the technicals for the dollar remain mixed and the bulls are absent.

I am short Euro and Sterling with small posi’s and stops above recent highs – just to see how things play out. Sterling is my favourite of the two. I’m also short Aussie again but less comfortable

On Commodities, Iron Ore is trying to break out and closed last night at $96.67. Newcastle Coal dropped another 30 cents to $70.05 on the September contract.

Nymex Crude closed at $103.48, Gold is at $1,316 and Silver is still clinging to $21 at $21.04 oz and Copper is unchanged at $3.25. On the Ags, Corn dipped a further 0.24%, Wheat was largely unchanged after yesterday’s move and Soybeans played catch-up, dropping 2.44%.

On the data front today, the Westpac-Melbourne Institute consumer confidence number is out at 10.30am and the market will be looking closely to see if there is a decent bounce. Then of course we have the Chinese data, Japanese machinery orders and a fairly light calender until the FOMC minutes tonight.

Greg McKenna

NB: Please note all references to rates above are approximate

To learn more about Greg McKenna, read on here.