Equity markets drop amid continued volatility, bond yields flat

Fuel on fire

The bond market is ready to turn up the heat even more on the stock market.

Emerging market stocks lost 1.78 percent. The U.S. Senate reached a bipartisan deal Wednesday that would boost spending limits by $300 billion over the next two years.

Benchmark 10-year notes last {US10YT=RR;NETCHNG_1*32:0; rose F1 fell -F1}/32 in price to yield {US10YT=RR;RT_YIELD_1} percent, from {US10YT=RR;HST_CLSYLD} percent late on Wednesday. As of Monday morning, the BSE Sensex is off almost 1,700 points from its all-time high of 36,443, while midcap stocks were bleeding even more.

Congressional efforts to approve a budget deal and avoid a government shutdown should remain in the headlines Thursday and could continue to stir discontent in the bond market.

Euro zone yields were also higher while a hawkish comment from the Bank of England regarding interest rates drove down United Kingdom stocks about 1 percent and boosted yields on United Kingdom government bonds to the highest since 2015.

At prevailing bond yield of 7.56 per cent, one would then require 13.56 per cent (adding 6 per cent risk premium) on equity to make a switch from bonds. It's been pretty ugly. "Is the bond market telling us something we don't know?"

US consumer prices rose 2.1 percent year-on-year in December and is forecast to stay around that pace this month. "Now they are saying we will take out the steroids, because it could have side-effects", said Nilesh Shah, MD at Kotak AMC.

"With US ten-year treasuries at four-year highs, does this herald the start of a bond bear market?". The fear is that Treasury yields will rise to levels that make stocks less attractive and force the Federal Reserve to fight inflation by aggressively raising interest rates.




"You could get into a little bit of circular logic here, as you hand leadership back and forth".

"This is how we started, go back to Friday and this is exactly where we were", said Art Hogan, chief market strategist at B. Riley FBR in NY.

And the VIX, a measure of market volatility, is near the highest level since August 2015.

A visitor is seen as market prices are reflected in a glass window at the Tokyo Stock Exchange (TSE) in Tokyo, Japan, February 6, 2018.

"The primary culprit was higher-than-expected wage growth in the January jobs report, which may have increased fears that the Federal Reserve would be more aggressive with interest rate hikes in 2018", according to LPL. At the same time, the USA deficit is growing and would be bumped up even more by the Senate budget deal, if it passes Congress. That compares with $420 billion net a year ago in notes and bonds. They got a lot of steroids of liquidity and low interest rates and refinancing, whereby US Fed picked up every junk subprime loan in the market. The deal looks set to increase the USA federal deficit and may stimulate inflation, encouraging the Federal Reserve to hike up interest rates quicker than anticipated. Still, that's a long way from the double-digit interest rates of the early 1980s. The ECB [European Central Bank] cut their quantitative easing in half.

"The market is looking for a new sustainable valuation level for both stocks and bonds, and that to me is the underlying catalyst", said Jim Paulsen, chief investment strategist at Leuthold Grup in Minneapolis.

"Nothing seems to be going right for the world's biggest bond market: "Auctions of 10- and 30-year debt this week saw tepid demand; Japan dumped USA debt in December, making 2017 the largest exodus from Treasuries in a decade; and, as the Bank of England just * a itemscope="itemscope" itemprop="StoryLink" href="/news/terminal/P3TYO33T6SQR" class="terminal-news-story" target="_blank" rel="nofollow noopener" *reminded traders, the global economy is humming.

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