US treasury yields continue to show no signs of picking up, the 10-year yield has once again fallen below 2.6%. The continued strength in the US bond market in the face of what appears to be reassuring economic data is puzzling. On Monday the US Services Purchasing Managers Survey for April was credited with boosting equities as the final figure of 55 came in above the flash estimate of 54.2. On the one hand, lower bond yields do make the return on equities look more attractive, the flip side to that is what the bond market might be trying to tell us about the outlook for the economy.
The Organization for Co-operation and Development (OECD) lowered its forecasts for global growth to 3.4% from 3.6% for 2014, adding cautionary comments on the outlook for the global economy. The OECD Secretary General was quoted as describing the global economy “not out of the woods yet”. The cut in global growth estimates appears to be prompted by a lowering in expectations for the US and Chinese economies. The Chinese economy is now expected to grow at 7.4% in 2014; The US economy is now expected to grow at 2.6% this year against previous expectations of 2.9%. In contrast, the UK economy gets the thumbs up as the OECD predicts growth of 3.2% for this year, up from its forecast six months ago of 2.4%, and it now expects the UK economy to grow in 2015 in 2.7%.
As global equities remain close to record highs, investors debate whether to exercise a little caution as we enter the summer period, a time that can prove volatile for equities. A JP Morgan research report summed up the case in their view for sticking with equities at this time. Firstly, the earnings season in their view is supportive, they point out 4x as many companies are raising guidance for 2014 as are lowering it. The Euro area recovery is gaining momentum, supply and demand side of credit is improving, investors are still not positioned bullishly, capex is picking up, as is M&A. Tuesday saw the latest deal as Bayer spent $14bn on Merck’s consumer care division.
It does sound a compelling argument for remaining in equities; the main contra point appears to be it’s gone up a lot already.