Answers on a postcard please

Equity markets continue to suggest that the wall of worry was reinforced enough for prices to rally further in the short term. For now, equity investors seem relatively sanguine  with the rise in commodity prices that is apparently being driven more by geopolitical concerns than demand drivers, and its possible inflationary implications. However, the bond market did have something of a reaction as the two-year US Treasury yield traded above 2.4%, on Thursday as the 10-year climbed to 2.9%. The yield gap between the two and ten year remains just below 50 basis points.

German ten-year yields also jumped higher on Thursday but remain close to 0.5%. It is hard to imagine that, whilst European interest rates, remain negative and the ECB continue to purchase bonds how US ten-year government debt yields can go much higher. As expectations rise that the Fed will do at least three rate rises possibly four is reflected in the two-year debt, and the ten-year pegged back by yields in Europe. This may be the cause of flattening of the US yield curve rather than the bond market possibly trying to predict the next recession. There has been so much manipulation of capital markets that its harder than ever to judge what signals asset prices are sending.

A CNBC reader survey has earnings as the focus for equity markets with the oil price the least. Flattening yield curves may be a lead indicator for economic recessions, rising oil prices are the biggest lead cause, historically, for an economic recession. Sixty dollars is supposed to be the ideal price for the global economy, just strong enough for emerging markets exposed to the commodity to support their economy but not too high to damage the developed economy.

The banks kick off the season and despite most of the major banks beating expectations the share prices have reacted, to say the least in a lukewarm way. Some analysts have questioned the quality of the beats as the banks trading divisions have taken advantage of the volatility. When it comes to technology the term out with the old in with the new comes to mind as IBM fell as numbers disappointed and Netflix jumped on strong subscriber growth.

It may be that equity market volatility will remain subdued but if oil prices do continue to climb alongside other commodity prices, equity and bond markets may get concerned that inflationary pressure will take over and central banks will need to react. Goldilocks and her porridge was a well-used phrase to describe the current state of the global economy last year. A nirvana of economic growth, low inflation and low-interest rates. That phrase has largely disappeared from the media commentary. So far there has not been a new one coined to describe the current climate. Answers on a postcard please.

Posted on April 19, 2018 .