Wednesday, 21 February, 2018

Dow Jones industrials plunge 1000 points

Dow plunges 1,033 points and sinks into correction Dow plunges 1,033 points and sinks into correction
Glenn Montgomery | 09 February, 2018, 07:10

What is making bond yields rise?

The question now is whether "this draws a line under the recent stock market correction or whether this is merely a dead cat bounce", analysts wrote.

The yield on the 10-year Treasury bond ticked higher again on Thursday morning, to 2.88%.

Benchmark Treasury yields rose on Wednesday after the weak demand in the U.S. Treasury Department auction of new 10-year notes and the U.S. Senate reached a budget deal, possibly adding to pressure on stocks.

Selling hit all S&P sectors, though the S&P financial index.SPSY, down 5.0 percent, was the biggest daily percentage decliner, followed by healthcare.SPSY, down 4.6 percent. The Dow traded up and down in a 1,900-point range this month alone.

New York Federal Reserve President Bill Dudley told Bloomberg News on Thursday that if the USA economy keeps getting stronger the central bank may be justified in raising rates four times this year.

Another way of thinking of this is to consider valuation multiples for each security.

Treasury yields moved higher on the day. The S&P 500 lost 1.22 points, or 0.04 per cent, to 2,680.44. "Since last autumn, investors had been betting on the goldilocks economy - solid economic expansion, improving corporate earnings and stable inflation". The full 2017 reading was 2.3 percent, just marginally higher than past years that have averaged 2 percent.

"The simplest way to look at it is, everything is relative". However, the sudden plunge in the stock markets was just the knee jerk reaction to the final straw - Kaplan's statement regarding interest rate hikes.

A related concept is net present value.

"Such easy monetary policy helps families and companies through lower borrowing costs, for mortgages and student loans, for example".

Rory McPherson, head of investment strategy at Psgima IM, said investors should expect more volatile markets heading into 2018, as this is the first year where the marginal buyer of bonds is not a central bank.

Many are bracing for more wild swings ahead as the Cboe Volatility index is holding at twice its level from a week ago.

Oil prices settled lower, pressured by rising USA output and other factors. To take that risk, one would certainly seek a risk premium over risk-free or less risky assets such as bonds. "The links are always tenuous and squishy at best".

7-year -10 bps @ 2.665%.

Attractive yields on a safer investment have made stocks suddenly less attractive. "You don't want to be caught in fixed income as rates are moving up". Rock-bottom financing costs have been a boon to earnings for a decade, a period in which the Federal Reserve has held rates near zero. At the same time as ten-year break-even rates have risen, so have oil prices. Standard & Poor's 500 index and the Nasdaq also finished down Wednesday.

Judging by remarks this week from policy makers, who were unmoved by rising yields and the losses in stocks, the Powell Fed isn't rushing to signal that tendency.

"I don't think this is a "one-day" that finishes today", he added.

"Friday's data has prompted a readjustment of that calculus with the potential for a fourth, and this change is likely to drive the US 10-year yield back to 3 percent in short order". This is the worst drop seen by the tech index since February of 2006. U.S. bond yields rose sharply on Monday after official data released on Friday showed United States wages were increasing at the fastest pace since 2009. All of that could result in a recession, which in the end is what most analysts say will kill the bull market.

"As rates rise, things, as far as equity investors are concerned, are getting worse", he said. The firm manages US$179 billion.

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