Ugly Sell Off Picture Spook Investors | Gold Down While Dollar Up

  • Global bond sell off intensifies, dollar index off its low
  • ECB’s governing council increase hawkish talks,  bullish long term outlook for euro
  • French GDP growth better than expectation (0.6% vs 0.5%)
  • Bitcoin still consolidating below 11K

Shock and horror are flashing on traders' dashboard as they start the day. Thanks to the US where we witnessed the worst bond sell off for 2018. Rising bond yield is a ticking time bomb. Expectations around higher inflation, stimulated by Trump’s tax incentive, need to be factored in. The markets have decided to wake up to this idea now because firms will be increasing wages and bonuses. Nonetheless, the bond sell-off spooked investors and it shifted their focus to VIX which surged yesterday. It is up by 25% so far this year.

Looking at the European markets and US futures, we do believe that the (bond sell-off) spill-over would continue. It appears that the chief anxiety amid investors is about rising US bond yields, a film which we have seen before. Better than expected French GDP q/q number (act 0.6%, est 0.5%) failed to offset this pessimism. Yesterday, the US 20 year bond yield jumped to it’s highest level since April 2014 and the 2-year bond yield accelerated to a level not seen since September 2008. The timing of this is important, because the Fed rate meeting is also due this week and there is a stronger probability that we may get a revision for the US economy in order to factor in the spillover effects of tax benefits.

The dollar index is the ultimate beneficiary of this as traders are staring at a true risk-off situation. The yellow metal typically jumps when volatility index explodes.  The adverse risk sentiment weighing on traders, however, there is no evidence of a shift in the move towards a safe haven. The textbook trade isn’t behaving the way it does. Perhaps, this is because of the dollar strength, some investors could consider this pullback as an opportunity and they are not worried about the overall health of the economy.

While the strength in the dollar has pushed the euro lower, however, traders are going to keep a close eye on the Eurozone’s economic growth reading which may show some signs of losing steam. The expectations are for 0.6% while the previous reading was at 0.7%. Nonetheless, despite the reading of 0.6%, investors still have an optimistic picture to look at especially when they look through the lens of economic growth which has some significant meaning. We do think that the ECB’s monetary policy would anchor in the coming months because they won’t have to worry about German coalition, which is taking forever and also Italian elections would not present anything serious which they need to worry about. This would help the German bond yields to rise,  and make the days of negative yield look like they never appeared.