While signals from bond markets are not always reliable and can be a poor predictor of shifts in the economy, stock markets are volatile and driven by sentiment. This is why bond markets are often referred to as “the adult in the room”, at times punishing countries by driving up bond yields when public finances deteriorate or politicians act recklessly.
Since Donald Trump’s re-election as US president, stock markets have been erratic. In the month following the election on November 5, the S&P 500 index rose about 5 per cent. Since then, however, the gauge has lost 2.2 per cent. While equity markets initially took comfort from the promise of tax cuts and deregulation, concerns about the other pillars of “Maganomics” – higher trade tariffs and a crackdown on immigration – are starting to weigh on sentiment.
The message from bond markets, on the other hand, has been far less ambiguous and more alarming. Since mid-September last year, the yield on the benchmark 10-year US Treasury bond has risen from 3.6 per cent to almost 4.8 per cent.
The sharp sell-off in bond markets occurred despite the start of the US Federal Reserve’s monetary easing cycle – which should be supporting the prices of long-term bonds – even though the Fed’s preferred measure of inflation is growing at the slowest pace since May last year. This a sign investors are concerned about the huge economic and policy uncertainty that pervades Trump’s second term.
Since the beginning of this year, the uncertainty has accentuated and exacerbated vulnerabilities in developed and developing economies, providing a foretaste of things to come. Only by connecting the dots does the severity of the threats posed by the “Trump policy mix”, in the words of Deutsche Bank, become apparent.
The surge in the US dollar since early October stems partly from the Fed’s decision last month to signal a much slower pace of monetary easing, mainly because of concerns about the inflationary impact of Trump’s policies. This has caused the dollar to hit its highest level against the currencies of developing economies since 1987, according to an index of the value of the US dollar against emerging market currencies produced by the Fed. Weak currencies make it harder for central banks, especially in Asia, to cut interest rates, adding to worries about growth.
02:15
China sees slowest economic growth in over a year with 4.6% GDP in third quarter
China sees slowest economic growth in over a year with 4.6% GDP in third quarter
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