China Makes Headlines Again

In September, China reported a sharper drop in exports than was expected. What does that mean for the bond market?

We haven’t heard from China in several months. After the January meltdown in Chinese stocks faded from view, there were no subsequent economic events in China that the bears were expecting. After that long run, China is back in the headlines. In September, China reported a sharper drop in exports than was expected. Some Chinese economic data experts said there were some technical issues at play, but all traders care about is the headline. Bond bulls and economic bears jumped on this as a sign of a weak global economy.

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As a result of the Chinese news, Dow futures are down 110 points in pre-opening trading after a low of -140, and bond prices are higher. Global equity indexes are all down a bit over 1%, and European bond yields are down about 4 basis points. The 10-year note closed at 1.77% yesterday, traded as low as 1.73% in overnight trading, and is 1.75% now.

The Benefit To The Bond Market

The China headline came at a good time for the bond market. While demand for the Treasury’s 10-year note auction was about average yesterday, dealers were a bit apprehensive about today’s 30-year bond auction. The fear is that if the auction does poorly, yields would move higher and the 10-year yield could break above 1.80%. That would be a bad sign for those chartheads out there. But the 10-year is comfortably below that level this morning, and that should draw in more buying by speculative traders who trade by charts. If the Chinese news does not keep yields contained, I think it would be fair to say the bond market is in trouble.

Everything said above is just another reason for the markets to do little-to-nothing, which is exactly what investors want. Investors don’t want to be forced into committing to any directional changes in the markets until after the election.

Dwight Johnston is the chief economist of the California and Nevada Credit Union Leagues and president of Dwight Johnston Economics. He is the author of a popular commentary site and is a frequent speaker at credit union board planning sessions and industry conferences.

October 13, 2016

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