This article was written in early November for the December 2018 print edition of Money Observer. Market data and share prices are likely to have since changed.
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The big news this month has been the climb in US 10-year Treasury bond yields to 3.2%, their highest level since July 2011. Bond yields had been rising gently (and their prices falling), reflecting confidence that the US economy was robust enough to weather trade wars and other setbacks. However, the rise has spooked markets, forcing a reassessment of risk-free assets compared with equities.
US equities defied logic in August by climbing 3 per cent, despite the rise in the federal funds rate. The S&P 500 index has now risen by 230 per cent since 2009 – the longest bull run in history – and has a price/earnings ratio more than 50 per cent higher than its historic average.
Far from a quiet summer lull, volatility and risk-aversion intensified over the holiday season. At various times the FTSE 100 index tumbled over 100 points in a day, as markets became nervous about the Turkey crisis and deepening trade wars. US Treasury Secretary Stephen Mnuchin is warning of further sanctions to hamper Turkish competitiveness, unless pastor Andrew Brunson is released from house arrest on espionage charges. It is a row that could easily escalate.
Trade war is the talking point this month, particularly after 51 US trade groups got together to warn US president Donald Trump of the ‘serious negative impacts’ of his tariffs. Some of the US’s most influential trade bodies – many focused on retail, car manufacture and agriculture – want a bill to curb the president’s powers by requiring the US Congress to approve any new tariff s.
The calm of May has given way to a big spike in stock market volatility. June kicked off with a crisis in Italy, further Brexit setbacks and sinister political antics from Donald Trump. Markets on both sides of the Atlantic are swinging sharply day by day, sometimes on the flimsiest of rationales.
Stock markets can be perverse. Having been braced for the fallout from the US administration’s decision to exit the Iran nuclear deal and impose severe sanctions, the S&P 500 index has surprised everyone by surging ahead. In fact, while the market plummeted during president Trump’s speech announcing the move, it finished the session higher.
Investor sentiment for developed markets has weakened, with some major indices displaying the dreaded ‘death cross.
US tariffs on steel and aluminium imports could be the first shot in a trade war that will damage the major markets.
Unease over US jobs data sparked a serious case of market jitters, but Ceri Jones views it as an opportunity.