What has happened
The rally in US Treasury bonds continued yesterday, with the US 10-year yield falling to under 1.35% by the close. There was no clear catalyst with several factors behind the moves, particularly volatility within the oil price and slightly weaker US survey data. Amidst these moves, growth areas such as technology performed whilst cyclicals led major indices lower.
US ISM Survey
One of the drivers of the cyclical weakness yesterday was the US services ISM figures, which came slightly weaker than the market had hoped. The reading of 60.1 was lower than the 63.5, which had been expected and represents an almost 4-point decline from last month’s reading. Of course, any reading above 50 still indicates expansion inactivity. The report pointed to strong demand for US services, but this was weighed against supply-side issues and rising input prices. Last week’s US employment report showed a sizeable expansion in services jobs whilst the ISM yesterday was more pessimistic around employment, so plenty of inconsistencies and questions remain.
COVID update
Global COVID cases have begun to rise, with the UK, Spain and other European nations seeing a pickup due to the Delta variant impact. There are some signs that the growth rate in UK cases is slowing, which will take the pressure off the UK government ahead of ‘Freedom Day. While the current wave is not leading to hospitalisations, it does increase the risk of creating a new variant, so there is still some policy balance to be found. Further to the talks between German Chancellor Merkel and UK PM Johnson, Germany is due to relaxing travel restrictions from the UK today. Further afield, Sydney has extended its lockdown as it has struggled to bring the delta variant under control despite recent restrictions.
What do we think?
Markets are unsure whether the breakdown in relations at Monday’s OPEC talks is ultimately positive for oil prices (no supply increases) or negative (countries choose to break from the controls). Regardless, a question mark over whether the current, elevated oil price is sustainable, combined with weaker US ISM services data and increasing delta variant cases, was enough to drive yields and cyclical sectors lower.
