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Global stocks extend selloff, Treasury yields retreat from near four-year highs

07 February 2018

New York's Dow Jones Industrial Average plunged more than two percent after the release of a healthy January jobs report that showed the biggest increase in wages in nine years. The index gave up 500 points in a matter of minutes Monday afternoon as Wall Street wags tried to decode events.

"In the case of risk aversion, we might see support for core government bonds", said Mathias van der Jeugt, head of market research at KBC. After a three-decade period when falling interest rates and bond yields provided a boost to stock prices, the potential for a sustained rise in yields has equities deep in the red in recent days.

Bond yields are rising as the Federal Reserve trims its US bond holdings.

Ratings agency Fitch last month said that many regulated utilities companies would also have to reduce how much they charge customers to reflect new tax rates.

The rout in USA stocks is also hitting markets around the world.

"This was crowd psychology at its best", said Daniel Wiener, chief executive of Adviser Investments. "Investors are looking at high gross domestic product growth in the first quarter. It will be, but not today".

The Dow and the broader U.S. Standard & Poor's 500 Index ended the week roughly 4-percent lower, their biggest weekly drops since early 2016, amid fears of inflation and disappointing quarterly corporate earnings results.

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The S&P energy index led the decliners among the 11 major S&P sectors, with a 2.03 percent fall. The technology-laden Nasdaq was down six of its last eight sessions as markets opened Monday. In all these years, we've had four official corrections, so not many, but we have also had 60 "panic attacks", as Yardeni likes to call them. Late Friday the Fed said it will freeze Wells Fargo's assets at the level where they stood at the end of past year until it can demonstrate improved internal controls.

The S&P 500 in January saw its 10th consecutive monthly gain, the longest streak in 59 years. "It's not setting some new kind of record other than its rapid ascent".

Friday's US payrolls report showed wages growing at their fastest pace in more than 8-1/2 years, fuelling expectations of both higher inflation and more interest-rate rises from the US Federal Reserve than previously anticipated.

The Schwab U.S. Dividend Equity ETF (SCHD.K), one of the biggest exchange traded funds providing exposure to dividend "aristocrats" - stocks which have 25-year histories of annual dividend raises - is up about 9 percent, outperforming the broader market slightly.

With this trend of mildly rising inflation, gold prices and T-bond yields will likely continue moving upward until there are signs of an economic slowdown and/or a bubble burst in stocks.

Asian stocks tumbled Tuesday morning, tracking a volatile day in Monday's US trading. Apple, Cisco, Intel and Microsoft were all on the upside as the rest of the 30-stock blue chip index went negative.

Market pros have been predicting a pullback for some time, noting that declines of 10 percent or more are common during bull markets.

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Many hailed the bounce in the markets over the last week as part of the natural ebb and flow of stocks. Central bank purchases in 2018 are on the decline to the tune of $1 trillion United States dollars less in net purchases versus previous year.

It wasn't like this in past episodes of equity-market selloffs.

"It is hard to see the 10 year US Treasury breaking much above 3 to 3 ¼% without a sustained increase in inflation, which would raise expectations of more aggressive central bank tightening".

These new concerns about rising inflation come after years of worry by USA officials about too little inflation.

The news sent benchmark 10-year Treasury yields - a key guide to interest rates globally - to fresh four-year highs and raised concerns that monetary policy will tighten more than thought. "Since last autumn, investors had been betting on the goldilocks economy - solid economic expansion, improving corporate earnings and stable inflation". That was more than twice as much as Monday's fall. In reality, the US economy is doing very well right now.

In a odd way, investors are nervous that the global economy is doing too well.

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Global stocks extend selloff, Treasury yields retreat from near four-year highs