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The Day Ahead: Global Risk and Oil Give Bonds a Head Start

Bond markets are coming out of the overnight session with a pleasantly surprising advantage, and a good reminder that our fate can be influenced by more than domestic economic data.  Weak data in China has been a lingering concern since mid 2015 with many pundits calling for the situation to deteriorate. 

Like the manufacturing report that was blamed for China's massive stock slide on Monday, last night's Caixin Services PMI (purchasing manager's index) was much weaker than expected.  China's Hang Seng stock index fell sharply at the open, bringing global equities futures lower in the process. 

Much like yesterday, the somewhat-panicked selling in equities markets resulted in a flight to safety for bond markets.  In other words, investor sentiment can be oversimplified as: "sell stocks, buy bonds."  News of Hydrogen Bomb test in North Korea further compounded the motivation for investors to shed risk.

Whether it's a chicken or an egg, oil prices are taking part in the general "risk-off" trading momentum, though it's correlation with interest rates can vary quite a bit at times.  European bond markets, on the other hand, are more likely to be moving in relative lock step with US bond markets recently, and that held true overnight.  Thus, all three geographical market sectors (Asia, Europe, America) got on board with the risk aversion trade, and all before any of the domestic economic data in the US.  ADP employment did come out much stronger than expected, but it remains to be seen if domestic data will even be able to trump the broader global economic concerns.

The following chart shows S&P futures, the Hang Seng index, 10yr Treasuries and German Bunds (blue, orange, yellow, red, respectively).

2016-1-6 bonds, china, S&P

This MBS Market Commentary is provided in partnership with MBS Live and provided exclusively to MBS Live Subcribers.