Date: August 13, 2019
Recession Fears Spike to 2011 High as Risk of Bubbles Spreads
“Recession fears are spreading among investors at a time when valuations across major assets are looking dangerously stretched following years of monetary stimulus, the latest Bank of America Corp. survey shows. About a third of asset managers polled believe a global recession is likely in the next 12 months, the highest probability since 2011 — when Europe was engulfed by a sovereign-debt crisis. Trade war concerns rose, topping the list of the biggest tail risks, followed by the fear of monetary policy impotence, according to Bank of America’s report. This month’s escalation in the U.S.-China trade spat sent investors searching for havens as the growth outlook darkened. Central banks across the world this year have been trying to support the economy by pledging further stimulus. However, such efforts have also increased the threat of bubbles in key markets. Fund managers surveyed by Bank of America see corporate and government bonds as particularly vulnerable to bubbles created by monetary officials, followed by U.S. stocks and gold. At the same time, only 11% of polled investors see fiscal policy as overly stimulative. Amid fears of an economic slump, fund managers in August were the most bullish on bonds since 2008, with 43% expecting lower short-term rates over the next 12 months and just 9% of investors predicting higher long-term rates. A total of 171 fund managers overseeing $455 billion in assets responded to the global fund manager survey.”
U.K. Wages Rise at Fastest Pace Since 2008, Employment Jumps
“U.K. wages rose at their fastest pace in 11 years in the three months through June and employment climbed to a record high. Basic earnings growth is now close to 4%, far above inflation and good news for consumers. The figures were bolstered by increases for National Health Service staff and a higher minimum wage introduced in April. The headline figures point to ongoing strength in the labor market, with employment growth far outstripping economists’ forecasts. However, there were some signs of the Brexit jitters weighing on the wider economy, with vacancies falling to their lowest level since early 2018. Productivity also slumped from a year earlier, its fourth straight decline. “This is far from a perfect jobs report. Employer caution is limiting the supply of new vacancies, yet stiff competition for recruits is still driving up wages,” said Pawel Adrjan, U.K. economist at the global job site Indeed. “Given the wider slowdown in the economy, the labor market is holding up surprisingly well,” he said. For now, the stronger-than-forecast figures show the labor market remains tight, meaning the Bank of England is currently unlikely to join the global rate-cutting trend. It also means consumer spending may provide support to the economy, which shrank in the second quarter for the first time since 2012. Average earnings excluding bonuses rose 3.9% from a year earlier, the most since the second quarter of 2008. Total earnings growth accelerated to 3.7%, also comfortably outpacing inflation. The number of people in work rose by 115,000. Employment growth in the latest three months was driven by hiring, though self-employment made up almost 30% of the gain. Women accounted for three quarters of the total increase. There were also 99,000 more EU nationals working in the U.K. than a year earlier. There was a slide in inactivity to a joint-record low as more people began looking for work. That left growth in jobs insufficient to absorb the increase in the active labor force, pushing up the unemployment rate for the first time in nine months. The lack of positions may reflect weaker demand for labor or firms finding it hard to find suitable candidates.”
China’s 10-Year Bond Yield Falls to 3% for First Time Since 2016
“China’s 10-year sovereign bond yield fell to 3% for the first time since 2016, joining a global rally of government debt as the nation’s economy slowed and its trade dispute with the U.S. worsened. The yield on the country’s most-active notes due in a decade fell 1 basis point to briefly trade at 3% in Shanghai. Escalations in the trade war since April have put a damper on sentiment in equities, helping spur a rally in Chinese sovereign bonds. The yield on the country’s 10-year debt, which hadn’t touched 3% since November 2016, is down about 40 basis points since its April peak. The advance in Chinese bonds followed a rally in their U.S. counterparts, as the yields on American long-end debt approached an all-time low overnight amid rising global trade concerns, political upheaval in Hong Kong and a crisis in Argentina. China’s economy also showed fresh signs of slowing, with data released on Monday suggesting the nation’s credit demand tumbled to the second-lowest amount this year in July. “The drop in the yield is probably a result of the rally in U.S. government bonds and the disappointing credit data,” said Wu Sijie, a senior trader at China Merchants Bank Co. “The room for the decline is limited if China doesn’t lower rates for its medium-term lending facility.” The yield on the 10-year sovereign note was at 3.01% Tuesday afternoon in Shanghai. The returns still stand out just as the world’s stockpile of negative-yielding bonds nears $16 trillion for the first time. China’s sovereign bonds lagged a global rally in recent months with one of the worst performances among the world’s biggest debt markets. Even as weak economic data strengthened the case for further stimulus, concern over credit risks after the government takeover of a lender were among the reasons seen deterring investors. The bull case for Chinese bonds is pegged on potential easing by China’s central bank and an increase in foreign flows helped by their inclusion in global indexes. But risks include a potentially wild yuan, which makes assets denominated in the Chinese currency less attractive to overseas investors. An escalation of the trade war could send the yuan to as low as 7.7 per dollar, according to Societe Generale SA.China’s stimulus plans may also disappoint bond bulls — the People’s Bank of China signaled Friday it will hold back from deploying large-scale measures for now.”
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