Janet Yellen did little to calm investors nerves in her testimony to congress on Wednesday and Thursday, as she appeared to back away from the possibility of further rate rises in the medium term. When sentiment is low markets focus on the negatives, which are plenty at present. Only a few weeks ago the Fed still seemed committed to raising rates four times this year, despite much scepticism from market participants, including ourselves. On Wednesday evening Janet Yellen fielded questions that included had the Fed looked at following the likes of Japan and Switzerland, and not only reversing December’s decision, but the possibility of negative interest rates? Her answer, surprisingly, was not to rule the idea out, but to question its legality. Bond markets are now pricing in the next US rate rise to come in 2018.
If treasury yields are an indication of how far investor worries have escalated in the past few days, then as the ten-year yield fell to 1.55% post the testimony, concern is pretty high. Writing this commentary a couple of years ago, the Fed backing away from further rate rises was seen as a good thing for risk assets, its now a sign that economic growth is weak and appears to have the opposite effect. She did add that in her view the US economy was not in recession, it would appear that Ms Yellen is becoming a minority in this opinion, however you would think she is better placed than most to judge.
Sentiment has been further dented by recent articles that have started to focus on the possible downside effects to negative interest rates on the bank sector. If markets start to believe higher rates are not helpful to the global economy and negative rates are having detrimental effects, risk assets are could remain under pressure.
On a more positive note, according to UBS negative sentiment is now reaching levels that markets bottomed from last August. In a piece out on Thursday UBS believe that only 4 times since 2000 has the gap between winners and losers within sectors been wider. The end of the 2000 tech bubble, the 2003 recession, March 2009 financial crisis and the June 2012-euro crisis. This gap indicates the world feels “pretty ill” about the future. Post these times in the next 12 month’s value outperforms growth substantially. At this present time buying value stocks over growth stocks feels an incredibly brave call to make, but historically it’s being brave that separates the investment winners from the losers.
The Vix closed on Thursday close to 30, so far despite equity markets reaching and in some cases falling below levels last August the “fear gauge” has yet to plumb to the same depths. Thirty has been a fear level from which equities have bounced from recently. Will we need to see the Vix reach 40 before equities can bounce again or will 30 be the new 40?