Global stock markets selloff accelerates

Gladys Abbott
February 7, 2018

There are two components to the 10-year US Treasury yield, and it is helpful to look at them separately. Yields have broken out of their 36-year downtrend line. It's Treasuries that are supposed to be in a bear market, after all.

We already knew that high market valuations were likely to exacerbate volatility, as was the absence of any meaningful pullback in all of previous year.

JPMorgan in mid-January raised its forecast of 10-year U. "The pullback is likely to be just an overdue correction, with say a 10 percent or so fall, rather than a severe bear market - providing the rise in bond yields is not too abrupt and recession is not imminent in the US with profits continuing to rise".

The Dow Jones Industrial Average fell 1,175.21 points, or 4.6 percent, to 24,345.75, the S&P 500 lost 113.19 points, or 4.10 percent, to 2,648.94 and the Nasdaq Composite dropped 273.42 points, or 3.78 percent, to 6,967.53. However, we would continue to view the latest sell-off as a healthy correction, which we believe is driven by investors taking profit on a strong 2017. At that point, long-end yield could follow suit, or the curve could flatten toward inversion, a traditional signal of an eventual recession.

The rise in bond yields, fuelled by a surging United States economy and corporate earnings, has spooked traders anxious that the Federal Reserve will raise borrowing costs more than the three times initially expected this year. To jump-start growth, central bankers around the world slashed interest rates and took other steps to push down yields on safe government bonds.

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Equity markets are suffering some competition in terms of investors for the first time in many weeks, he said. Central bankers have nurtured the world economy to the general ward from the ICU. Investors who ignore market fluctuations and hold their bonds to maturity will always get their money back, plus they collect interest along the way. Brent crude, the standard for worldwide oil prices, lost 96 cents, or 1.4 percent, to $67.62 a barrel in London. A stronger economy generally strokes inflation.

There are speculations that the US Fed may turn hawkish, if inflation hits the target of 2 per cent growth.

I do not think the NZ economy has improved so much compared to the USA to justify our bonds trading at an interest rate on par with U.S. bonds. Inflation has an inverse relation with bond prices, and positive relation with bond yields. To me, it just does not make sense that we are near what would be considered "full-employment", our $18 trillion economy is growing at a robust 3%, labor productivity is reported to be weak, and inflation is not yet upon us. Stock prices, as representing an estimate of the current value of future profits, should automatically rise as rates decline. By doing so, it might spare itself from the wrath of the bond market vigilantes that could add to financial market volatility and that could lead to an abrupt bursting of the global equity market bubble. "Equity nervousness seems to be about repricing for higher yields and tighter Fed policy".

German 10-year Bund yields fell 2 bps to 0.74 percent, off nearly 2-1/2 year highs of 0.774 percent hit in early trade. USA economic growth was running at a 2.6 annualized rate in the fourth quarter last year and the unemployment rate is at a 17-year low of 4.1 percent.

So if you still think a 10 per cent long-term capital gains tax is what is hurting Dalal Street?

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