April 24, 2018
Bonds Steady as Dollar Rally Cools; Stocks Mixed: Markets Wrap
The rise in U.S. Treasury yields appeared to stall on Tuesday, with the benchmark rate trading sideways after a selloff this week took it to within a whisker of 3 percent. Stocks in Europe struggled for traction following gains for most Asian markets as the earnings season gathered pace. The yield on 10-year U.S. notes was little changed after the securities pared an earlier advance, while the dollar nudged lower after jumping on Monday to the highest level since January. The Stoxx Europe 600 Index pared an increase as traders assessed a mixed bag of corporate results, while U.S. equity futures posted a more solid jump. The yen retreated, helping spur Japan’s Topix index to the highest in almost two months, and Chinese shares rallied on signs the government may ease off tightening measures if warranted. Investors have been weighing the implications of climbing bond yields that were in part spurred by higher commodity prices and concern surrounding their inflationary impact on the wider economy. But volatility in interest-rate markets remains low and equity price swings are well off the highs seen earlier this year, indicating investors believe rising borrowing costs may not be enough to cause outsized pain to equities — for now. “For us it’s more the reasons why we’re seeing the move: better growth outlook, a little bit more inflation and faster rate hikes being priced in by the market,” Kerry Craig, Melbourne-based global market strategist at JPMorgan Asset Management, told Bloomberg TV. “It should be reaffirming the fact that we see a global economy that’s looking relatively healthy.”
How 3% Yields Could Reshape the Investing Landscape
Ten-year Treasury yields sit closer to 3 percent than at any time in the past four years, prompting investors to dust off their playbooks for how to trade in an era of relatively higher rates. Rising rates isn’t exactly a new problem for markets — the 10-year yield jumped 30 basis points in January alone — but this time the spike’s driven by surging commodity prices, not heady economic gains. And that’s thrown a wrinkle into the discussion, particularly when it comes to equities. “Historically, the stock market has done OK with rising inflation, provided economic momentum was also rising,” Jim Paulsen, chief investment strategist at Leuthold Group, wrote in a note to clients Monday. “Stocks also have performed well even when economic momentum has faded, if inflation also moderates. However, periods of stagflation have produced poor results in both the stock and bond markets.” Since the financial crisis, stocks have paid out more than fixed income, but the premium is waning: The spread between the S&P 500’s earnings yield and that of the 10-year Treasury is hovering near the lowest levels in eight years.
U.K. Balances Day-to-Day Budget for First Time Since 2002
Britain was in surplus on its day-to-day budget for the first full fiscal year since the early 2000s, a milestone that is almost certain to revive calls for an end to austerity. Revenue exceeded spending by 112 million pounds ($156 million) in the 12 months through March, meaning Britain is now borrowing only to finance capital investment, figures from the Office for National Statistics showed Tuesday. Including investment, the deficit narrowed to 42.6 billion pounds, the least in 11 years and below the 45.2 billion pounds predicted by budgetary officials last month. In March alone, the shortfall unexpectedly narrowed to 1.3 billion pounds, the lowest for the month since 2004. Almost a decade of austerity has seen the deficit fall from 9.9 percent of GDP in the aftermath of the financial crisis to 2.1 percent last year, but the cuts have left voters weary and taken a heavy toll on Prime Minister Theresa May’s Conservative government. The squeeze has led to the loss of hundreds of thousands of local-authority jobs and left hospital emergency services struggling to cope with a spike in winter illnesses. In a sign that the government is yielding to public pressure, it announced last month it was lifting the cap on pay increases for nurses and other workers in the National Health Service. The elimination of the current-budget deficit came a year earlier than the Office for Budget Responsibility predicted but two years later than George Osborne envisaged when he became chancellor in 2010 — before the European sovereign-debt crisis hit economies across the region.
Snow Might Have Cooled U.K. Growth
The U.K. economy probably slowed in the first quarter because of snowy weather, which could give Bank of England policy makers pause for thought when they take their next decision on interest rates. Output probably dropped to 0.3 percent in the three months through March from 0.4 percent, according to a Bloomberg survey. The data are particularly important after Governor Mark Carney damped expectations of an increase in borrowing costs in May, saying last week that officials are “conscious that there are other meetings” this year at which they could act.
China Stocks Get Adrenaline Shot From Policy Easing Signals
Chinese stocks got a much-needed shot in the arm Tuesday, gaining the most in two months amid signs the government is willing to ease its tightening campaign to avoid an overly sharp economic slowdown. The rally followed a meeting where policy makers mentioned the need to boost domestic demand for the first time since 2015, and dropped a reference to deleveraging. Government bonds, which had been advancing at the fastest pace since 2008, declined. That was a change for China’s equity investors. Only days ago, a $1 trillion rout had left banks and other onshore giants flirting with a bear market, while foreign-listed tech was having its worst start to a year since 2013, and previously profitable Wall Street strategies tracking the cheapest stocks or biggest dividend payers had all but unraveled. Even small caps, which enjoyed a brief moment in the sun in March, had resumed a multiyear rout. “The Politburo meeting sends a signal that China may roll out fiscal stimulus and supportive monetary policies to resolve financial risk and stabilize markets,” said Ken Chen, a Shanghai-based analyst with KGI Securities Co. “That has boosted sentiment on the market, especially for blue chips.” Bulls returned in full force Tuesday, at one point sending the FTSE China A50 Index toward its biggest daily gain since 2016. All industry groups on the broader CSI 300 Index rose, with property developers and banks leading the advance. Even tech rebounded from a two-day slump. Firms tied to materials advanced as strength in cement companies outweighed declines for aluminum makers. The ChiNext gauge of small caps jumped 3.1 percent, its best day this month. While the rally helped patch some of the damage inflicted on Chinese stocks this year, the country’s benchmarks are still among the world’s worst performers since their January peaks. For Bocom International Holdings Co.’s Hao Hong, onshore equities are going through a volatile period, with valuations, a slowing economy and limited inflation pressure tipping the balance in favor of bonds.