Stock Markets Sink, Suggesting Global Rout Will Go On

Global stockmarket indices

No one really knows what a bond bear market would look like, largely because yields have been on a downtrend in the United States for more than 30 years.

Wall Street is pointing towards a weaker session, with US stock futures down a quarter percent and investors seeing the potential for higher inflation and borrowing costs.

Japan's Nikkei shed 2.9 percent, en route for a weekly loss of 8.6 percent - its biggest since February 2016.

Ryan Detrick, of LPL Financial, said: "The bond market has definitely got the stock market's attention".

The bond market is ready to turn up the heat even more on the stock market.

Adrian Lowcock, investment director at Architas, added there is a double risk with investing in government bonds due to the current rising rate environment and the end of QE, especially in the US. "Today it feels like leadership is going back to the rate market and now stocks are reacting to it", said John Briggs, head of strategy at NatWest Markets. During the years in which the Fed held interest rates near zero, safety-seeking long-term investors were forced to buy riskier assets to meet their return targets. That catapulted 10-year Treasury yields - a key global interest rates indicator - to fresh four-year highs.

Sure enough, bond yields hit a four-year high Thursday. Rising bond yields, he notes, are a sign of economic strength.

The market performance also reflects the strong USA and global economies, which have boosted corporate profits. Traders are now putting the chances of a 25 basis point hike by the Fed at its March meeting at 84.5 percent, according to Thomson Reuters data. A soft 10-year auction added to the jump in yields, which move opposite prices. The fear is that Treasury yields will rise to levels that make stocks less attractive and force the Federal Reserve to fight inflation by aggressively raising interest rates. The figure is a 7.7 percentage point increase from the previous week and had been only 16 percent at the start of the year.

But overall, elevated yields have been blamed for kicking off a stock market rout that's left the Dow Jones Industrial Average looking at its biggest weekly percentage loss since October 2008.

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

Federal Reserve Bank of Dallas President Robert Kaplan said in an interview with Bloomberg Television on Thursday that more volatility in equity markets will have little impact on the broader economy, suggesting an important shift in the outlook for interest rates.

The Dow was down 501 points, or 2 percent, to 24,397.

Investors are weighing whether the sharp swings this week are the start of a deeper correction or just a temporary bump in the prolonged bull market.

The stock market is still up dramatically since President Trump's election. "The catalyst needn't be big".

But analysts also caution yields are not at levels that should be alarming to investors, and in fact are at levels that signal a healthier global economy, and the performance of some stocks this week points to a belief the consumer is also getting healthier. Relative to yields, Treasuries now trade at roughly 37 times the annual interest payout, which in a rough sense might be considered their earnings.

"Fundamentals are still positive, there is strong economic growth and strong earnings growth - those will help stocks move higher over time", said Kate Warne, investment strategist at Edward Jones in St. Louis. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. This article is strictly for informational purposes only.

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