The bond sell-off has partially reversed after interventions from central bankers and some data that showed a rate cut in the US is now more likely later this month. It’s been a bit of a wild week for debt traders, and stock market watchers have paid the price too amid a flight to safety: ie precious metals and cash.
This morning the FTSE is in the green (slightly), while the Dax, which has been hard hit this week, is up 0.5 per cent. Shares in Paris are in the red but the country has bigger issues than just bonds to deal with, given the confidence vote in the French PM set for Monday.
Overnight, New York posted good numbers too with the S&P up half a per cent. Tech stocks did well with the Nasdaq up a full per cent, although much of this was down to Alphabet’s favourable antitrust ruling which sent the shares up 9 per cent. Asia, however, was slightly different, with Chinese and Hong Kong stocks falling (some significantly) while the rest of the region did OK. According to Bloomberg, Chinese financial market regulators are set to limit stock market speculation, which had a suitably negative impact..
So what stopped the bond sell-off? The US Jolts jobs opening data came in below expectations, and lower than the month before, leading to traders upping bets on the Federal Reserve cutting rates on 17 September. Markets are now 98 per cent certain of a 25 basis point cut, with the data supporting the Fed’s narrative that the job market is weaker than it looks, and that rising inflation is likely transitory.
Bond yields are still much higher than at the start of the month. Bank of England governor Andrew Bailey yesterday told MPs they didn’t need to panic, with the UK’s yield curve still firmly in the “middle of the pack” despite the long-end 30-year yields rising to high levels early yesterday. The headlines aren’t helping, and Bailey does have a point. However, as we’ve discussed all week, what bond markets are telling the Labour government is loud and clear, and Bailey may have to pick up the pieces. Rising yields were helpful when the Bank wanted to tighten financial conditions to curb inflation. But what happens to the Bank Rate when it needs to be cut to stimulate growth, but yields go the other way? The monetary policy committee is already split, and this isn’t going to help.
By Taha Lokhandwala