Markets

Global stock market selloff accelerates

Global stock market selloff accelerates

With regard to where we are in rates, when you look at economic performance, both global and domestic, economic assessments from the world's major central banks with regard to projected growth and inflation, fiscal stimulus, and the potential for a large increase in the government budget deficit, suddenly a 2.75% to 3% ten-year Treasury rate looks just about right. This was against the backdrop of a strongly rising trend thanks to very positive economic conditions and President Trump's business friendly policies.

The yield on 10-year U.S. Treasury debt reached a four-year high of 2.885 percent, after Friday's increase of almost 7 basis points. This, combined with a very strong start to this year of 7.5%, very high levels of short-term investor optimism and lots of talk of a "melt up" left the U.S. share market overbought and highly vulnerable to a correction, which we may now be starting to see. Traders are rushing into the safety of bonds amid the selling, pushing yields in the belly of the Treasury curve down more than 10 basis points.

The CBOE Volatility Index was trading at its highest since November 2016 at 18.68.

The slump began Friday as investors anxious that higher inflation and interest rates could derail the long-running rally.

Rising T-Bond Yields aren't good for stock or real estate valuations.

Investors may get a hint of the direction of interest rates when trading resumes in Asia early Monday, and possibly more insight after the U.S. Treasury's $66 billion in auctions of 3-, 10- and 30-year bonds from Tuesday to Thursday. But without fresh impetus the momentum fizzled, allowing bond yields to pull back.

How severe will the back up in bond yields be?

"This will be bad for bonds and mediocre for equities".

Even after this week's recovery in bond markets, 10-year yields in Germany and the U.

A little more than a week into the New Year, billionaire bond guru Bill Gross proclaimed the start of a bond bear market, after an extraordinary bullish run spanning more than three decades.

However, on Monday, the Treasury bond yields saw buying as investors fled to safe-haven instruments leading to fall in USA 10 Year bond yield by 19bps to 2.70, as the United States stocks plunged.

AMP Capital chief economist Shane Oliver said that while the market has priced in two or three rate hikes by the US Federal Reserve throughout 2018, he is expecting four or even five. The next table shows U.S. share market falls greater than 10% since the 1970s.

Japan's Topix index declined 1.9 percent and the Nikkei 225 Stock Average sank 2.2 percent.

Milligan warned against reading too much into Friday's USA payroll numbers: "There is a long way to go between one monthly figure saying US wages are a little more than expected to saying core inflation in the world economy is moving away". Historically, corrections of 5 percent occur every 90 to 120 days. This bolstered inflationary expectations, which in turn fueled speculation that the U.S. Federal Reserve would raise interest rates more quickly.

Falls associated with recessions are in red.

We maintain a $32 price estimate for Bank of America's shares, which is around the current market price. Consumer spending is up, as are wages (which could offset higher consumer borrowing rates).

Monetary policy decisions are due in Australia, Russia, India, Brazil, Poland, Romania, the U.K., New Zealand, Serbia, Peru, and the Philippines. The Fed Funds rates of 1.25 - 1.5% is still well below nominal growth of just over 4%.

The smaller the difference, the lesser ERP investors receive, making so-called risk-free assets such as bonds more attractive. We are watching inflation which is rising.

As a result, earnings growth is likely to remain strong in the year ahead.

Friday's markets went tumbling on good economic news as the Labor Department reported a 2.9 percent increase in hourly earnings. Surely that must be bad for profits?