Market Euphoria May Turn to Despair If 10-Year Yield Jumps to 3%
It’s getting harder and harder to quarantine the selloff in Treasuries from equities and corporate bonds. The benchmark 10-year U.S. yield cracked 2.7 percent on Monday, rising to a point many forecasters weren’t expecting until the final months of 2018. For over a year, range-bound Treasuries helped keep financial markets in a Goldilocks state, with interest rates slowly rising due to favorable forces like stronger global growth and the Federal Reserve spearheading a gradual move away from crisis-era monetary policy. Yet the start of 2018 caught many investors off guard, with the 10-year yield on pace for its steepest monthly increase since November 2016. Suddenly, they’re confronted with thinking about what yield level could end the good times seen since the presidential election. For many, 3 percent is the breaking point at which corporate financing costs would get too expensive, the equity market would lose its luster and growth momentum would fade. “We are at a turning point in the psyche of markets,” said Marty Mitchell, a former head government bond trader at Stifel Nicolaus & Co. and now an independent strategist. “A lot of people point to 3 percent on the 10-year as the critical level for stocks,” he said, noting that higher rates signal traders are realizing that quantitative easing policies really are on the way out.
Euro-Area Economy Posts Strong 2017 Finish Buoyed by ECB
The euro-area economy finished off last year with another quarter of robust growth, and confidence among businesses and households suggests there’s no slowdown in sight. Gross domestic product rose 0.6 percent in the three months through December, in line with forecasts and marking a 19th straight expansion. The French and Spanish economies, two of the bloc’s largest, both recorded similarly solid rates of growth. The strong quarter put the euro region’s 2017 expansion at 2.5 percent, better than anticipated by the European Central Bank and the fastest since before the financial crisis in 2008. In a sign the vibrant pace is set to carry on, a separate release showed regional economic confidence remained close to a 17-year high in January. “We remain very, very optimistic for this year on growth,” said Anatoli Annenkov, an economist at Societe Generale in London. “Of course this was the fourth quarter but the carry-over from last year continues into this year.” The euro was little changed after the report and traded at $1.2421 at 11:51 a.m. Frankfurt time, up 0.3 percent.
French Economy Sustains Momentum, Has Best Year Since 2011
The French economy expanded for a fifth straight quarter, delivering its best full-year since 2011 as the election of President Emmanuel Macron combined with a global upturn to bolster confidence and investment. Gross domestic product rose 0.6 percent in the three months through December, in line with the median forecast of economists. Capital investment rose 1.1 percent, household spending increased 0.3 percent and net trade added to growth. France’s economy grew 1.9 percent last year. The revival in France’s economic fortunes comes after years of sluggish expansion and has been bolstered by Macron’s economic reforms as well as business tax cuts implemented by the previous administration. It coincides with a pickup in the broader euro area that’s seen the 19-nation region post its best growth in a decade.
China’s Risk Crackdown Is Giving Giant Bank Stocks a Boost
China’s top banks — the biggest in the world — have typically traded below the value of their assets on concern over rising bad debt and falling profitability. That’s starting to change, and quickly. A recent surge in the Hong Kong-traded shares of China’s Big Four state banks lifted their average price-to-book value ratio to 1 as of Monday. That’s the highest since an equity boom ended in 2015. China Construction Bank Corp. and Industrial & Commercial Bank of China Ltd. are now back above the value of their net assets. The turnaround reflects optimism that President Xi Jinping’s deleveraging drive will reduce financial risks at a time when rising interest rates are boosting profits. Monthly new yuan loans reached a record last year and the non-performing loan ratio has stabilized. “The fact the policy makers seem to be much more convinced about deleveraging and committed toward deleveraging is making the sector more investable again,” said Michael Chang, an analyst at CIMB Securities Ltd. in Hong Kong. “You want to be able to sleep at night. You want to be confident that the sector has a long-term sustainable path.” There’s no shortage of confidence among investors right now. Banks are six of the 10 top performers on the H-share benchmark this year, with Agricultural Bank of China Ltd. set for its biggest monthly gain since 2011. Adding to positive sentiment are swelling inflows of capital from mainland investors eager to chase laggards. Even after the rally, the Big Four trade at an average 18 percent discount to their Shanghai-traded shares. The large banks slipped on Tuesday as the Hang Seng China Enterprises Index slid the most since December.