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Bond market slugs ASX200

At a trading conference in Noosa recently, I spoke of the role that bonds play in driving markets and the investment allocation process. Knowing what the answer would be, I asked the fifty delegates of mainly private traders how many watched or traded the bond market. As I suspected only a small number of folks put their hands up.

Professional traders would not consider trading without one eye trained on the bond market. Most share a common belief that bonds lead both equities and foreign exchange markets. The reason I mention this is after weak economic data in China and German yesterday, the U.S. bond market has sent a fresh signal that a recession is becoming a much greater threat.

Overnight, the yield on the 10-year Treasury rate fell below the 2-year rate for the first time since 2007, joining the 3 month – 10-year spread in inversion territory. Not to be outdone the 2 year - 10yr bond spread in the UK inverted for the first time in 11 years after an ECB newsletter called for “banks to continue preparing for all possible contingencies” given that “a no-deal Brexit is still a very real possibility”.

Bond market slugs ASX200

While there have been occasions when the bond market has got it wrong, the equity market is not in a forgiving type of mood. The delays to the implementation of new tariffs announced earlier this week quickly forgotten by equity traders globally with the local index, the ASX200 currently trading -2% lower, near 6450.

In our Week Ahead Video https://www.cityindex.com.au/the-week-ahead/ we highlighted the importance of the 6600 resistance zone “while below there, I think there’s a chance we can push down a little bit lower, at least towards the next layer of support … 6200.”

In a technical framework, the rally from the 6444 low up to this week’s high at 6600 counts as the second wave of an ongoing correction. A break and close below 6444 would signal that the next leg of the correction lower towards our 6200/6170 target has commenced.

At which point, I would expect to see buyers return to the market and a bounce develop from 6200. The main caveat here is if the bond market is correct and a recession is coming, the rebound is likely to be temporary at best.

Bond market slugs ASX200

Source Tradingview. The figures stated are as of the 15th of August 2019. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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