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Treasury’s Curveball: Global Stocks Rally Stalled

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This quarter saw huge spirals in yields of the US bonds with the 10-year yields below T-bill rates which are happening for the first time in more than 10 years, on the contrary, the yield curve of the 2 years to 10 years was high which is confusing the investors. On the one hand, the long-term yields show signs of recession, but the shorter-term yields provide optimism. The investors are looking for some indicators to determine which way the markets and the economy will move. They need more information on the macroeconomic data and also the earnings made by companies in the quarter beginning this year to get some confidence.

The yield curve:

The analysts meanwhile are not very optimistic about growth and earnings and have reduced the forecast to its lowest in the past few years. They are expecting companies to post a reduction in earnings in the first quarter and also to report their worst performance in the past few years as per data. The S&P 500 index listed companies are likely to report a 1.9% fall in earnings from the 17% growth that it showed in the last quarter of 2018. The companies listed on STOXX 600 is also likely to report its slowest growth since 2017 by earning 2.1% Y-o-Y.

Some like the fund manager of Legal and General Investment Management Justin Onuekwusi are not concerned about the prices of stocks and the yield curve. But others like Paul O’Connor head of Janus Henderson who is part of the multi-asset team was concerned and said ‘We’ve gone a long way now toward pricing in the central banks, and for risk assets to push on into Q2 we are going to need growth to pick up the baton. The way the risk assets have begun to react to the yield curve is further confirmation that risk assets have probably extracted as much positivity as they can from lower yields’.

Have Stocks run their course?

As per a global poll conducted on investors, it showed diverse views on the which way the equities will move this year. As per estimates, the S&P 500 index will rise to 25% while others indicated that it can fall by 10%. Even the European markets showed contrasting views with the estimates pegged from a 15% increase and a 20% increase for STOXX 600 which shows that the stocks are done increasing. The next few weeks will decide the fate of these stocks as more companies report their earnings until then the investors will be wary.

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