Stock Markets Sink, Suggesting Global Rout Will Go On

Gladys Abbott
February 11, 2018

While perhaps not the overriding factor, the oil price will be worth monitoring to see if any significant and sustained correction precipitates a halt to the current bond market sell-off.

Stocks closed lower Wednesday, but not before swinging wildly to sharply higher and lower levels, as interest rates rose. Outside of the financial crisis, they have moved in opposing directions.

Washington is putting more pressure on rates. Average hourly wages grew 2.9 percent from a year ago - the largest increase since 2009. In early trading today, the Dow Jones is down 1.06% at 25,249.46 while the S&P 500 is down 0.77% at 2,740.89. The move was its biggest one-day reversal since February 2016.

On Thursday, world stock markets remained unstable as US bond yields rose near four-year highs following congressional leaders agreeing on a two-year budget deal that will raise government spending by almost $300 billion. It's been pretty ugly.

"In the case of risk aversion, we might see support for core government bonds", said Mathias van der Jeugt, head of market research at KBC. U.S. 10-year Treasury yields climbed above 2.8% this week, the highest since early 2014. We prefer bonds that have decent spread and low sensitivity to rising rates, such as asset-backed income.

Analysts at Mizuho point out that the two-year Treasury yield is now higher than the S&P 500's forward dividend yield, which prompts a "psychological test" for investors.

"You could get into a little bit of circular logic here, as you hand leadership back and forth".

At last, the markets are "catching up", said Nandini Ramakrishnan, a global market strategist at JPMorgan Asset Management.

A 3 per cent yield is looked upon by investors as a motive for people to flee the risk of stocks for the relative safety of bonds.

Emerging market stocks lost 1.73 percent.

What traders might be ignoring is that any threat to the economy from higher yields or swooning stocks might themselves prompt the Fed to slow the pace of tightening - making the market's current panic potentially premature.

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The bipartisan spending bill, expected to pass Congress, called for a higher-than-expected spending cap of $300 billion.

"It's just the latest log on the fire", said Schumacher.

Treasury issuance was already set to rise this year before the passage of a sweeping tax overhaul in December that's slated to significantly add to the deficit.

Sure enough, bond yields hit a four-year high Thursday. The dovish policymaker reiterated his argument that the central bank can afford to hold off further rate hikes until the middle of the year.

A strong dollar policy has allowed the Fed to keep interest rates low for a prolonged period, argues Rebecca Patterson of Bessemer Trust.

Jim O'Neill, Former Commerce Secretary in the United Kingdom government, on Monday said the U.S. is growing and the central bank may need to tighten monetary policy faster than the market has perceived.

"Over the last half a dozen of years we have been saying equity valuations can be higher because we are living in a low interest rate and low inflation environment but that's reversing a little bit and that's what we are staring at now", said Art Hogan, chief market strategist at B. Riley FBR in NY. Furthermore, the sharp rise in United States yields has come at a time when U.S. economic data releases have been more mixed, with the exception of January's USA employment report.

"The interest rates and volatility beach ball was suppressed under water, sat on by the 1,000-pound gorilla of the Fed, the ECB, and the Bank of England".

"Unfortunately, Trump is going to be the 'fall guy.' This thing is all going to collapse while he's president", Schiff said in an interview with InfoWars.

Philadelphia Fed President Patrick Harker speaks at 8 a.m. ET in NY, and both Minneapolis Fed President Neel Kashkari and Kansas City Fed President Esther George have 9 a.m. appearances.

Fed speakers will get a lot of attention Thursday.

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