Just a heads up as we get into the new week that today is a US market holiday in observance of Columbus Day. While Wall Street may be open for business, the bond market will be closed.
As such, traders will be missing a key piece of the puzzle to start the week given how Treasury yields have been dictating broader market sentiment as of late. The surge higher in long-end yields especially have been keeping stocks in check, adding to investor concerns over inflation risks and also the Fed outlook.
So without that as a potential barometer today, things could get a little tricky.
Sure, traders could still extrapolate how the bond market might react given the push up in oil prices amid geopolitical tensions. A missile attack on Riyadh’s international airport marks a widening regional conflict and is likely to fuel further selling in Treasuries. But until we actually get to the bond market open tomorrow, we’re not going to get a clear answer just yet. And traders will heed caution in not wanting to fully commit to things to start the week as such.
I mean, the holiday could also see fewer institutional participants actively trading and that potentially makes for thinner liquidity than usual across other markets.
In lieu of that, just be wary that thin liquidity doesn’t just make for quieter markets. It also means that there are lesser trading volumes and so even relatively modest flows can be enough to sometimes trigger exaggerated price swings on the screens.
Taking that into account, it means we could see stocks, currencies and gold more vulnerable to choppy moves in the day ahead. That is especially the case as traders will have to wait an extra day for Treasury yields to provide their usual confirmation of broader market sentiment.
So, just be wary in reading too much into the early moves to start the week. Tuesday will provide a better test of whether the moves we see today will have any staying power.
And looking to the week ahead, the US CPI report on 14 October will be the most important key risk event to be mindful of. That will offer a more important test on whether price pressures in the US are intensifying further at the end of the third quarter, thus impacting how markets will take to the Fed outlook in the weeks ahead.
This article was written by Justin Low at investinglive.com.