Equity prices recently have been more closely correlated to moves in bond markets, than moves in the oil price. Recently developed bond yields have started to slip, are we about to see a change in the actions of central bankers? Theresa May’s first major party conference speech may have been high on rhetoric and low in substance, but she did express the view that quantitative easing policies are now not necessarily helping the economy. It is a fair point that despite billions of pounds, yen, euros and dollars being spent buying government bonds the global economies growth remains lacklustre. One could also argue about what state the global economy may have been in without it. There has also been speculation that the ECB may be looking to pull back from its bond buying program, this has apparently been denied. The days of quantitative easing may be coming to an end. Even if the ECB are not going to pull back, the possibility of the program being extended beyond next March looks less likely.
Ben Broadbent, the deputy governor of the Bank of England, in a presentation on Wednesday admitted that the Bank of England had been too pessimistic about the impact of Brexit on the UK economy. So far he is not the only one. It will be interesting to see what picture the Bank paints at next month’s inflation report, and how he defends the hastily introduced decision to introduce further quantitative easing last August, particularly post Theresa May’s comments.
Developed global bond yields have started to rise in the past days, also partly in anticipation of the Federal Reserve’s likely move to raise interest rates before the year end. The pound has weakened against the US dollar, however the dollar has also gained ground on a basket of currencies. The big loser in the past week has been the price of gold as it falls to a four-month low. Gold’s attractiveness has increased in a world where negative interest rates appear to dominate, an asset that has no yield is probably more attractive that one with a negative yield. If capital markets are sensing that central banks are moving away from negative rates and quantitative easing, the period of extreme liquidity has reached its peak, gold’s lustre could fade.
Rather in a way that actions of central bankers may have caused the price of gold to rise, valuations in equities have also been driven higher by these low bond yields. There is hope amongst analysts that we may be at the trough of the earnings cycle, meaning earnings should pick up from here. If, over the earnings period starting next week we see further signs that earnings are improving then equities may cope better with a selloff in the bond market.