Written Commentary
FINANCIAL FUTURES OVERNIGHT
STOCK INDEX FUTURES
In our opinion stock market has been fortunate to avoid a wholesale liquidation from this week’s spike in interest rates. However, with UK, EU, Japanese, and US sovereign bond yields jumping the most in a week since March the prospect of “rotation” from stocks to bonds is growing by the hour. Certainly, the S&P managed to reject yesterday’s probe below 7600 but an early slide back below that level today leaves the index poised to make a fifth straight day of lower lows and lower highs.
CURRENCIES
While the dollar is managing to hold this week’s modest recovery and is seeing support from sharp gains in US treasury yields, the dollar is facing broad competition from many G7 central banks threatening higher rates. It is possible that the surge in oil prices and ongoing military exchanges have rekindled war premium buying in the dollar and it is also possible that last week’s payroll report gives credence to the prospects the Fed will raise rates next week and therefore the dollar retains a very slim fundamental edge.
TREASURY FUTURES
Not surprisingly, the threat from the US Treasury Secretary to cap rising treasury yields has resulted in the market moving decisively to test his resolve. In fact, yesterday’s jump in treasury yields the most significant day over a drop in yields since May 15th and the bear camp has plenty of fundamental backing to continue the slide. Certainly, the market is short-term oversold from this week’s wash, but fundamental repricing short-term technical issues can be written. In retrospect, the inflation threat has been given validity this week with diesel fuel prices hitting six dollars per gallon for the first time ever and August producer price index readings coming in above acceptable Fed targets of 0.4%. While any may argue that the excluding food and energy component highlights concentrated inflation from energy prices, the fact is steady or even higher energy prices are likely to rekindle downstream price pressures.
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