BondWorld : Inflation at highs and falling bond yields: stock correction next buying opportunity?
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Andrea De Gaetano – Independent Analyst
BondWorld – All rights reserved
News of the new Omicron variant triggered strong selling in global equities. High-quality government bonds benefited as they rose in price and yields fell.
The US 10-year yield fell to 1.40% from the 1.70% mark last week.
What’s scaring the markets is not the Omicron variant per se (it’s not the first and probably won’t be the last), but the quick reaction of governments who have announced partial border closures and possible new lockdowns.
The collapse in oil prices, from $83 a barrel last month to $68 today on WTI, reflects an economic slowdown of which there are signs.
Falling bond yields, flight to quality, combined with higher-than-expected inflation, at 6% in Germany and 4.9% in the eurozone in November, dragged down real bond yields, which have been in negative territory for some time.
This is keeping interest in equities alive, especially after the ongoing correction that is reabsorbing the excess euphoria of recent weeks.
Bottlenecks in supply chains due to the pandemic suggest that inflation will remain high, especially in the event of new lockdowns.
Biden reappointed Jerome Powell as head of the Federal Reserve: will market turbulence and the Omicron uncertainty be enough to slow tapering? Traders are wondering whether the start of tapering sets the stage for a revival of December 2018. Back then, the Fed had continued to raise interest rates (to 2.25-2.5%), despite signs of an economic slowdown. It is too early to tell, but it seems that the ECB and the Fed have learned from the experience of 2018 and are intent on remaining accommodative.
If this is the case, the correction in equities will become a buying opportunity, at least with a view to a technical rebound.
After the scare, bonds would take a breather, but without moving too far from the yields we have seen this year. To protect themselves against inflation, investors would return to buying commodities and equities.
We wait calmly for the correction to unfold, which is natural after months of uninterrupted rally.
Gradual buybacks on individual stocks have eased in recent weeks, gradually reducing hedges on equity indices.
In the bond segment, European investors are finding inflation-protecting yields on Emerging Market bonds, where central banks have already raised interest rates and which have yet to benefit from the strong economic recovery we have seen in Developed Countries. The unknown remains of the Fed’s tapering, with consequent currency risk.
The market’s real intentions will become clear at the next rebound: a short-term correction or the start of a new recession? For now, the first scenario seems more likely.
Quelle: BondWorld.ch
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