Willian De Vijlder, Chief Economist at BNP Paribas, explains that during the current business cycle, rising bond yields have been accompanied by rising equity prices and from a historical perspective, the rise in equities in recent months has been abnormally strong, probably helped by the prospect of corporate tax cuts.
“Market developments last week show a high sensitivity to economic surprises which may end up fuelling economic uncertainty.”
“Search engines generate a huge number of articles published last week referring to “healthy correction”. Whether the big drop of Wall Street last Tuesday was healthy very much depends on one’s positioning. Opinions of somebody looking for a good moment to enter the market versus those invested in a short VIX strategy will differ.”
“From an economic perspective, the recent events are quite instructive. Firstly, the knock-on effets of the stock market decline was as expected: a big jump in implied volatility (VIX), international spillover effects and a decline in US treasury yields on the back of safe haven buying. Secondly, the sequencing of movements was interesting. A rising trend in long term interest rates eventually impacted share prices following the surprising jump in hourly wages last Friday.”
“The equity market decline in turn pushed down bond yields. This would indicate that in a scenario of a late cycle pick-up in inflation, the cumulative rise in bond yields could be capped by the nervous reaction of equities in response to higher rates. Such a development could still weigh on the economic outlook but more because of increased uncertainty, rather than significantly higher bond yields."
“What makes the cycle since September 2017 so special is the abnormally strong equity rally, quite probably fuelled by the prospect of corporate tax cuts. There is a price though: greater sensitivity to unwelcome surprises. The events last week are a useful reminder of this. It could also end up fuelling economic uncertainty.”
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these securities. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Forex involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility.