This morning’s market reactions to the unexpected jobs number gave me even more conviction that the current capital trends are in place. Gold, bonds and currencies all moved in anticipation of further Fed easing, while stocks did not. For a while now, bad news has been good news for stocks because it has meant continued/more Quantitative Easing. This morning was not the case with stocks continuing to move WITH the US dollar. Capital flows are starting to overtake Fed-influenced markets…
Despite what the Fed says, the bond market isn’t buying in either as yields have held these levels for a few weeks now. Not to mention, the Eurodollar futures due in 5 years are showing a 3.7% yield. Eurodollars are time deposits of US dollars held in banks outside of the US. Basically this is predicting that short-term rates will be about 3.5% higher than today’s rates, 5 years from now.
There’s been a lot of talk about who will be the next Fed chairman – Janet Yellen or Larry Summers. Will they continue with QE? Will they taper? Quite honestly, I don’t think it matters. If the markets continue to act as they were this morning then the longer-term trend of capital entering the US is set in place and there’s little to nothing they can do to change it. The story remains: higher yields and higher US stock prices.
In the short-term though, I wouldn’t be surprised to see a counter move in both markets. I think bonds have overshot to downside, especially the 5-year part of the curve. The stock market overall has been losing momentum and a lot of companies popped higher after announcing earnings which makes me think this choppy, sideways trend is likely to continue. At this point, I’m actually hoping for a flush lower to reset things and attract new buyers for the next leg higher.
Thanks for following and have a great weekend!
-Nick