top of page

Market Comment - September

Never in the history of the US republic have US Treasury returns been negative 3 years in a row, writes Bank of America. The investment bankers analysed data going back until 1787. Looking at the current sell-off in Government Bonds, the odds are rising that we are heading for this unprecedented event. Rising yields, especially on the long end of the yield curve, are putting pressure on long duration assets. Equity valuations can’t defy the quick rise in interest rates. While earnings have been better than expected, equity prices have risen faster than earnings, leading to a P/E expansion, which does not make sense during times of rising rates. Earnings reports are just around the corner which will mark the next test for valuations. October is an infamous month for volatility and sharpmarket corrections and ultimately a good time to take risk. Unfortunately, October of 2018 is an intense flashback for investors as it marked only a pause in an incredible sell-off in equities that lasted until the year-end. Then, the culprit was Jerome Powell who believed overtightening monetary policy would be not problematic. From a trading aspect, buying October 2018 was good for an 8.26% rally, but from there the market dropped 16.78% into year-end. The FED needed to adjust monetary policy to calm financial markets. Today we could argue, that the US Central Bank is once again getting too restrictive. Currently, US Treasury Bond markets gets supply from the reduction of the balance sheet (FED), the increase in debt (Treasury), Hedge Funds short selling and China, which continues to unload US Government bonds. On the buy side, we only have Asset Managers and Institutional Investors. The market must show a price attractive enough to get more buyers stepping up to the plate. According to TardaGrada, unfortunately, there is a lot of room to run when it comes to the US 10-Year Treasury Yield. 5.10% is conservative price target. A fast move above 5% could be viewed as capitulation of the bond holders and mark the end of the current sell-off. Equities and commodities will certainly have some problems dealing with this. It is clear that we are heading towards an endgame in a cyclical bear market for bonds. Bear markets usually end in a dramatic way. As a general rule, buying Treasury Bonds after the last rate hike is a good and safe trade. Unfortunately, markets still expect at least one more rate hike until the end of the year. Either the bond market has to be saved by the Central Bank, or weak economic data. Worth mentioning that the Bond Volatility Index MOVE has surged over 40% during the month of September. An other interesting observation is the fact, that the Equal Weighted S&P500 Index turned negative by the end of the month, underperforming the S&P500 by more than 12.00%. The same goes for the NYSE Composite Index, trading down 0.75% beginning October.The reason is the relative strength of large mega caps - the last men standing in the US stock market.

Comentarios


Los comentarios se han desactivado.
bottom of page