Bond yield curve prevents global stocks of stocks


LONDON (Reuters) – This year's rally on global stock markets fell at the end of the quarter, with signs of warning from bond markets, central bank paybacks and persistent trade concerns spreading consensus on what will happen in 2019.

The DAX chart of the German stock price index is portrayed on the stock exchange in Frankfurt, Germany on March 29, 2019. REUTERS / Staff / File Photo

The pan-European STOXX 600 index rose 12.2% in the first three months of the year, its best quarter in four years, while the S & P 500 is on the way to its highest quarterly gain in almost a decade.

A return was expected after the historic defeat in late 2018, but few investors predicted the size of the rebound or the scale of the turnaround of European and US central banks over the interest rates that helped propel it.

Most gains were recorded in January – between 6 and 8 percent – as dovish comments from the Federal Reserve, economic stimuli in China and easing trade tensions between Beijing and Washington have allayed concerns about slowing economic growth.

In March, however, the pace slowed to 1% as the euphoria over slowing rates turned to worries over what the Fed and the ECB's position said about the world economy amid the lukewarm growth of US and the euro area.

Now, few are having a strong vision.

"People are wondering if they lost the rally and then think there is no point in investing when the curve is reversed and the economy is slowing," said Willem Sels, chief market strategist at HSBC Private Banking.

He calculates that global stocks have the potential to rise another 5 to 7 percent, with the reversal of the excessively exaggerated bond yield curve.

"The next few weeks will be more volatile, people will be worried until they see the data improve and first quarter profits are not very good, so we are in a zone of greater volatility," he said.

An investor survey around the world in February revealed the wide dispersion of views on how stocks will emerge in the next 12 months, illustrating the lack of consensus across the market.

Take the estimates for the S & P 500: The highest required the index to rise 25%, while the lowest hit the market by dropping about 10% by mid 2020.

Europe showed a similar disparity, with estimates varying between a 15% increase and a more than 20% increase for the STOXX 600.

In the end, the median of the projections for the STOXX 600 and the pan-European FTSE 100 were on the same level as the current markets, suggesting that stock gains are over.

The implied volatility in the European and North American stock markets, often seen as a measure of fear, also plummeted in the first quarter. Wall Street's fear indicator fell more than half to 13 points from December's peaks, while the same measure in Europe fell to a third of its highs at the end of 2018.


Closing a wild quarter were huge swings in US bond yields last week that plunged investors deeper into the mess.

With 10-year US bond yields below three-month bond rates for the first time in more than a decade, fears of the recession were swirling.

But the 2 to 10 year interest curve increased, offering conflicting signals that there was no cause for alarm.

After all, the world economy is actually moving at a decent pace, corporate profits are still growing, albeit slower, and the main central banks are increasingly dovish.

While it may take months before markets are established – and this depends on decent macroeconomic data – Wouter Sturkenboom, chief investment strategist at EMEA and APAC at the Northern Trust, estimates that bond movements have been exaggerated.

"We believe government bonds are exaggerating now. This is a vote of distrust at the Fed and its communication strategy. That's why we're not lowering the risk now, "he said.

To take stock of their lethargy, investors need decent macroeconomic data and first-quarter earnings to restore worn-out confidence.

"We have come a long way towards central bank prices, and for risk assets to move into the second quarter, we will need growth to get the stick," said Paul O & # 39; Connor, head of the Janus Henderson group in the UK . team of various assets based on

"The way risk assets began to react to the interest curve is further confirmation that risk assets have probably drawn as much positivity as possible from lower yields."

But analysts have cut their 2019 earnings outlook to their lowest level in three years, and most expect the next earnings season to be weak.

Companies listed on the S & P 500 Index are expected to report a 1.9 percent contraction in profits in the first quarter, down from almost 17 percent in the fourth quarter and the worst performance in years, according to I / B / E / S Refinitiv.

European companies listed on the STOXX 600 are expected to see annual growth of 2.1% in profits, the slowest since the third quarter of 2017.

After a breathtaking run, Justin Onuekwusi, fund manager at Legal & General Investment Management, said he was not too worried that stocks were taking a breath.

"We've had such a strong comeback, but the markets do not go straight. It is inevitable that you will receive some sort of rest, "he said.

Report of Josephine Mason; Additional reporting by Helen Reid and Sujata Rao; Graphics by Ritvik Carvalho; Editing by Hugh Lawson

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