Saturday, 24 February, 2018

German bonds yields rise to highest levels since 2015, stocks plunge

Why are rising bonds making stocks bleed from Wall Street to Dalal Street US Treasury yields slip from highs as traders brace for stock sell-off
Nellie Chapman | 06 February, 2018, 16:31

For more than a year, investors have brushed off bombastic talk about nuclear war, dysfunction on Capitol Hill and other worrisome situations.

As the Dow Jones gloom spread, the Stoxx Europe 600 index fell 3% in early trading in London, with "every sector in the red", CNBC says.

This week, the calm cracked. The Nasdaq fell 273, or 3.8 percent, to 6,967.

"The president's focus is on our long-term economic fundamentals, which remain exceptionally strong, with strengthening USA economic growth, historically low unemployment and increasing wages for American workers".

"It is hard to see the 10 year US Treasury breaking much above 3 to 3 ΒΌ% without a sustained increase in inflation, which would raise expectations of more aggressive central bank tightening". "Since last autumn, investors had been betting on the goldilocks economy - solid economic expansion, improving corporate earnings and stable inflation".

Even with the two-day bloodletting, the Dow is still up 21% in the past 12 months and 272% since the beginning of the bull market in 2009. This week's drop could test their resolve. Rising rates have myriad consequences, including making it more expensive for companies and individuals to borrow money. Unless markets suddenly reverse themselves, the recent bondcano probably reflects an awakening: When investors revise up their view of interest rates, bond prices tumble.

The slump began Friday as investors anxious that higher inflation and interest rates could derail the long-running rally. However, since bond yields are rising for "good" reasons (i.e. a stronger economy) rather than "bad" reasons (surging inflation), it should not lead to heavy equity losses. The US Federal Reserve is already rattling nerves by intimating a faster incline in rates than previously assumed.

The wage data and expectations of higher price pressures resulting from the recent tax overhaul and on expectations of infrastructure spending "all fed into inflation expectations, and it wasn't that the Fed was going to raise rates too much, it was that they weren't going to be quick enough", Brien said.

The dramatic market purge sent the temporarily down to correction levels - more than 10 percent from its all-time high of 26,616, reached in January.

AMP Capital chief economist Shane Oliver said that while the market has priced in two or three rate hikes by the US Federal Reserve throughout 2018, he is expecting four or even five.

The selling was also fuelled by profit-taking after a blistering January that saw several indexes strike record or multi-year highs, while energy firms were hit by a drop in oil prices. It's at its highest level since 2014.

The U.S. economy also still looks in good shape.

Those concerns echoed worldwide.

Among the clearest indications of the Fed's current nonchalant attitude toward inflation risk is its basic adherence to the interest rate path that it set for itself at the start of 2017. The German DAX index lost 4.2 per cent over the week, and South Korea's Kospi index lost 1.9 per cent.

With Monday's declines, the S&P 500 erased its gains for 2018 and is now down 0.9 percent in 2018.

The other key ingredient for sustained global growth is that emergency monetary policy measures put in place after the financial crisis - such as zero (or negative) interest rates, quantitative easing (bond buying) and forward guidance (a commitment to maintaining loose money) - are not withdrawn too quickly.

Analysts scrambled to explain the global losses.

So whether a recession is imminent or not in the U.S. is critically important in terms of whether we will see a major bear market or not.

First, share market falls associated with recession tend to last longer with an average fall lasting 16 months as opposed to 9 months for all 10% plus falls. That compares with 67 per cent a quarter earlier.

Suddenly, yields on relatively safe government securities are on a par, and in many cases superior, with those of much riskier stocks.

The broader index S&P 500 declined by 0.79% to 2,740.44 points. Going back to 1929, the average was 92 days, according to Goldman Sachs.

In the bond market, the focus is on equities, but also on this week's auctions.