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“It seems the tradable buy on bonds will need a flight-to-safety bid on a wave of fear washing over risk markets”, Gundlach told Reuters late on Saturday.
This week, the calm cracked. This pushed up United States bond yields sharply, which in turn hit equity investor sentiments.
US stocks were trading lower in early afternoon on Monday as bond yields continued to hover near multi-year highs and losses in energy and financial stocks weighed.
Oil prices settled lower, pressured by rising US output and other factors. It’s the opposite of something that has bugged stock bulls for years, the flattening yield curve, which can imply moribund expectations for long-term growth. The average 30-year fixed mortgage rate is around 4.2 percent, up from less than 4 percent at the end of 2017.
In Australia, the ASX 200 lost 1.6 per cent by the close of trading on Monday afternoon – the largest single-day fall since September 2016. They knew that what goes up may go down again, and they did not want to take the blame for market forces beyond their control.
We have not seen the excesses – massive debt growth, overinvestment, capacity constraints or excessive inflation – that normally precede recessions. Given that the market is still trading near all-time high level – despite the recent correction – on mere earnings revival hopes, one may, for example, seek that “risk premium” at 6 per cent. This week’s drop could test their resolve.
When interest rates rise sharply, stocks often fall.
As the stock market fell on Monday, the White House said the fundamentals of the us economy are strong.
Treasury yields were recently rising amid Fed concerns of a pickup in inflation and the jobs report showing wages were rising faster than expected. This, along with surging bond yields – 10-year US Treasury bond yields rose to 2.84% at the end of last week, its highest level in four years from 2.66% in the previous week and 2.41% at the start of 2018 – make risk assets less enticing, more so given expensive valuations.
Investors fear that the Federal Reserve is going to fumble its attempts to keep inflation in check.
A market correction is usually defined as a drop of more than 10 percent from recent highs.
Bond traders, who not long ago had doubted the Fed’s resolve to hike rates even three times this year, are increasingly betting that a fourth interest rate increase may be in the offing.
USA payrolls report on Friday indicated that wages are growing at their fastest pace in over eight years, adding to the apprehensions that both inflation and interest rates are more likely to increase earlier than imagined. It’s at its highest level since 2014.
Those concerns echoed worldwide. It supports emerging market currencies, which in turn creates scope for lower interest rates in those countries.
In Asia, Japan’s Nikkei 225 Index slid almost 1-percent and South Korea’s Kospi fell 1.7-percent. If faster price increases do begin to emerge, the Fed could try to head them off with more aggressive rate action. Both industries are capital-intensive, requiring frequent loan rollovers and bond issues, so higher borrowing costs have outsized effects on bottom line profits. S&P 500 e-minis were down 9 points, or 0.33 percent, with 402,884 contracts traded. As long as inflation doesn’t spike out of control, stocks can rise if earnings continue to grow.
Analysts scrambled to explain the global losses.
The strengthening economy is translating into not only stronger profits for companies but also better sales, something that investors have been keen to see. That compares with 67 per cent a quarter earlier.
Now, the combination of global growth and tax incentives to make capital investments “actually completely changed the paradigm to just borrow to buy back your stock”, said Rieder of BlackRock.
The Standard & Poor’s 500, the benchmark for many index funds, fell 113 points, or 4.1 percent, to 2,648.
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The S&P500 returned 5.7% in the month on the way to fresh record highs, which lifted the return over one year to 26.6%. That’s a record number of days.
