Markets often behave counter intuitively. A case in point being the bad news released out of the US on Tuesday night, which actually led to good news for investors.
On Tuesday night (our time), there was bad economic news announced out of the US, with unemployment moving higher. Bad news right? Then why were markets up? All markets!
The US economy seemingly underperforming the view of most in the market, means there will be no end to the QE gravy train any time soon, and traders pinned their ears back and bought everything: equities or bonds it made no difference. Like a child with cash burning a hole in their pocket, they bought everything they could.
Australian trading followed suit, as shown in the graph below. The graph shows Australian Commonwealth Government futures traded over the 24 hours to 4pm on Wednesday with three interesting points shown in the graph:
- At the opening of trade, futures were bought heavily, pushing yields down immediately. Following the initial flurry, markets settled down as they began to think about the release of yesterday’s Australian inflation figures.
- When the inflation figures were released, because the numbers were higher than expected (which would suggest pressure on the Reserve Bank to raise interest rates), futures were sold off.
- Then finally, the market decided it liked the US story more than the Australian inflation story and they commenced buying again, pushing the futures onto an ever upward trend through to the end of the day – further reducing the expected 10-year yield.
[1]So things are looking worse, but the markets don’t care, as they see the US taper being pushed off into the distance with the free money of QE3 to cover over any short-term problems.
All this buying has pushed the Australian yield curve flatter – off about 20 basis points over the last two days – so investors looking for any relief of higher term deposit rates may be disappointed.
Australian yield curve
[2]Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- Charlie Aitken: Time to get Telstra before everybody else does [3]
- Brendan Warton: The inside scoop on Crown Limited [4]
- Roger Montgomery: Slater & Gordon a buy based on its offshore strategy [5]
- Penny Pryor: Buy, Sell, Hold – what the brokers say [6]
- Tony Negline: SMSFs versus small APRA funds [7]
- Question of the Week: Tricky tax-free re-contributions [8]