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AutomaticEarth<>Debt Rattle February 11 2018


by Raúl Ilargi Meijer at 11:23

• What Crushed Stocks? (WS)

• Test Of Nerve For Markets As 10 Years Of Cheap Money Come To An End (G.)

• Market Tests Millennial Traders Who’ve Never Seen A Crash (BBG)

• Bond-Stock Clash Has Just Begun as Inflation Looms (BBG)

• IMF Chief Lagarde Says Market Swings Aren’t Worrying (R.)

• UK Labour Vows Renationalisation Of Water, Energy And Rail (G.)

• Australia’s Big Banks Focus On Job Cuts As Inquiry Looms (R.)

• Treating Mental Illness Could Save Global Economy Billions (CNBC)

• Pain Pill Giant Purdue to Stop Promotion of Opioids to Doctors (BBG)

• Asylum Seekers In UK Living In ‘Disgraceful, Unsafe’ Housing (G.)

• Russia Might Sell S-400 Systems To US If Americans Feel Insecure (RT)

• Oxfam Staff Partied With Prostitutes In Chad, Haiti, (G.)

• Maclean’s Is Asking Men To Pay 26% More For Latest Issue (Maclean’s)

• US Professor Fired After Telling Student ‘Australia Isn’t A Country’ (RT)

Bond markets are 10x stock markets?!

• What Crushed Stocks? (WS)

On Friday at around 1:40 p.m., during whiplash-inducing market moves, the S&P 500 index was down 1.9%, bringing the total loss for the week to 8.3%, which would have been the biggest weekly loss since November 2008, after the Lehman bankruptcy. But dip-buyers jumped in courageously and saved the day. The S&P 500 ended up 1.5%, bringing to the total loss for the week to 5.2%, the worst week since, well, the selloff in January 2016. Everyone has their own reasons why stocks plunged last week. Some blamed algorithmic trading. Others blamed the short-volatility financial complex that blew up.

More specifically, Jim Cramer blamed “a group of complete morons” who traded in this space. Others blamed the stratospheric valuations of stocks that had been rallying for eight years with only a few dimples in between, and it’s simply time to unwind some of those gains. Whatever the factors might have been, rising bond yields certainly had something to do with it. They tend to hit stocks, eventually. Last week, prices of short-dated Treasuries edged down and prices of long-dated Treasuries edged down, and their yields edged up, but there was some turmoil in the middle, with some interesting consequences.The three-month Treasury yield rose to 1.55% on Friday, the highest since September 11, 2008. Investors are beginning to price in a rate hike in March:

"But the two-year yield, after having surged to 2.16% on February 1, got very nervous, dropping and bouncing during the week, and fell sharply on Friday, ending the week at 2.05%:"

The 10-year yield closed on Friday at 2.83% and in late trading went on to 2.85%. The interesting thing about this is the difference (the “spread”) between the two-year yield and the 10-year yield. It surged. This spread is one of the indications of the slope of the yield curve and was one of the most watched bond-data points during the scare last year over an “inverted” yield curve. This is a phenomenon where the two-year yield would be higher than the 10-year yield. The last time this happened was before the Financial Crisis. By early January, the spread between the two-year yield and the 10-year yield had dropped as low as 50 basis points (0.5 percentage points), the lowest since October 2007. As the two-year yield kept spiking, the 10-year yield had started rising, but not fast enough. All this has changed, and the 10-year yield has been rising faster than the two-year yield and the spread has widened to 78 basis points on Friday:

The 30-year yield rose to 3.14% on Friday. For the first time, it is now back where it had been on December 14, 2016, when the Fed stopped flip-flopping and started getting serious about raising its target range for the federal funds rate. The market responded to each rate hike with increases in short-term yields but defied the Fed on longer-term yields, which fell until September 2017. So what happened last week was that the two-year yield fell, while the yields of most longer maturities stayed put or rose, steepening the yield curve from the two-year yield on up.

The chart below shows the “yield curves” as they occurred on these four dates: • Yields on Friday, February 9, 2018 (red line) • Yields on December 29, 2017 (black line) • Yields on August 29, 2017 (green line) two weeks before the QE unwind was detailed. • Yields on December 14, 2016 (blue line) when the Fed stopped flip-flopping, raised its rates, and became a clockwork. Note how the spread has widened at the longer-dated ends between the black line (December 29, 2017) and the red line (Friday), and how the slope of the red line has steepened, with the 30-year yield surging 40 basis points over those six weeks. That’s a big move:

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The cheap money has BEEN the entire market.

• Test Of Nerve For Markets As 10 Years Of Cheap Money Come To An End (G.)

Stock markets are heading for a wild ride this year as central bankers strap on their bullet-proof vests and test investors’ willingness to accept higher interest rates. Last week’s share price crashes, which in two days wiped $4 trillion off the value of markets around the world, was just a foretaste of the battle to come. In the days following Monday’s crash, share values have recovered strongly only to dive again as competing theories about the path of interest rates and the likely impact on economic growth fight for attention. Most investors want the era of cheap borrowing to continue and many are willing to sell their shareholdings if it looks like coming to an end. Without low interest rates, they cannot borrow and invest cheaply, especially in the assets that for the past decade have gone up every year by much more than their salary – property and shares.

Countless businesses have also come to rely on low borrowing costs to keep going, and investors fear they might go bust should their bank raise loan rates. Weaning companies and investors off their addiction was never going to be easy, even 10 years after central banks first put their stimulus packages in place, and despite warnings that these measures need to end. For some time, the US Federal Reserve has taken on the role of the advance guard, forging a path towards higher rates for others to follow. But its campaign got off to a faltering start. Back in 2013 it was forced to retreat when it signalled in the mildest terms that it would begin withdrawing its quantitative easing programme. The main effect of QE was to drive down long-term interest rates, allowing investors to borrow cheaply not just over one or five years, but for 30 years.

And so its withdrawal was as much of a blow for some fund managers as an immediate rate rise. Wall Street and markets in Europe and Asia, where heavy selling turned into a rout, forced Fed officials to retreat. The Fed adopted a more incremental approach. It gave markets more warning and spaced out the policy decisions. As it entered 2017, US interest rates had trebled, but only from 0.25% to 0.75%. Yet the economy was booming more than ever. The Fed appeared ready to get tougher, and with justification, according to Karen Ward at JP Morgan Asset Management. After the heavy lifting needed to get the industrialised world back from bankruptcy, she said, “economies are now rested”. Ward, who until recently was an adviser to the chancellor, Philip Hammond, said: “Households and businesses are feeling better about the future. They do not need a boost in quite the same way. Central banks can ease off the accelerator without troubling either growth or markets.”

Read more … BRIEFS or use link to access Full articles:
https://www.theautomaticearth.com/2018/02/debt-rattle-february-11-2018/