Stocks have continued their 2-3 week sell-off (since June 11th) with the S&P and Dow down more than -2% and -4% respectively, US Treasury 10-year yields have today fallen below 2.85% (from above 3% earlier in the month) as have 30-year yields from 3.15% to 3% – after a strong auction yesterday demonstrated support at these levels. Meanwhile, Bloomberg splattered their front page with “Hedge Fund Managers See Echo of Past Crashes in Markets” with the likes of Greg Coffey calling, “The ghosts of 2000 are upon us”.
Yesterday’s hawkish testimony from Fed Chair Janet Yellen sent the Dow and SP500 to new all-time-highs along with a rally in the dollar and global equity markets and pushed Treasury yields back above 2.5%. Markets seem to have focused on her reference to the recent improving economic data - drawing a consensus that a June (or even the possibility of March) rate rise may be on the table. However Yellen also stressed caution over the uncertain economic picture; notably the risks and ‘considerable uncertainty’ associated with the current administration’s plan to boost growth through further unsustainable fiscal stimulus. In contrast she stressed ‘the importance of improving the pace of longer-run economic growth’.
In disappointing news this morning future episodes of 'The Apprentice' in America are now on hold due to Donald Trump becoming otherwise engaged - but this does not mean we will see less of him. For as of 2:30am EST (7:30am GMT) this morning Mr Trump became President-Elect of an USD18tn economy, a federal budget of USD3.8tn and set to become Commander in Chief of a 2m strong armed forces and the most powerful nuclear arsenal in the world. Furthermore, if true to his promises, he will be preoccupied with a complete overhaul of US taxation, trade and foreign policies (so we may still see him getting plenty of people ‘fired’).
Yesterday the Bank of England (BoE) found itself unable buy enough long dated gilts as investors continue to cling on to developed government bonds of all varieties. Following the BoE’s decision to cut the UK base rate and expand its quantitative easing programme by £60bn it only managed to receive offers to purchase £1.12bn of gilts with maturities over 15 years versus their target of £1.17bn. At least part of the reason for this shortage of availability is the more illiquid markets over the summ er – indeed the ECB overbought in earlier months in expectation of such illiquidity but the recent post Brexit expansion of QE obviously had no such option. This prevailing shortage, versus demand, of government bonds looks likely to remain a prolonged dilemma for central banks and investors alike.