Stocks reconverge with yields

<p>Is the two-month divergence between stocks and yields coming to an end? The 20% decline in US bond yields since the start of the year […]</p>

Is the two-month divergence between stocks and yields coming to an end? The 20% decline in US bond yields since the start of the year was initially accompanied by a selloff in US and world equities, until these reversed course, while yields resumed their sell-off. Today, all European indices as well as the Dow Jones Industrials Index are down on the year due to a combination of escalating geopolitical tensions and growth concerns in Continental Europe and emerging markets.  Meanwhile, bond yields’ selloff is increasingly attributed to safehaven flows rather than a dovish policy from the Fed.

We mentioned in previous pieces that it is only a matter of time before the divergence reach an end via a “catch-down” in equities with falling yields, rather than a rebound in yields alongside rallying equities.

The Fed’s intention to conclude QE3 by October was previously seen as hawkish and yields-positive, but if China’s uncertain growth dynamics prevail and US dollar adds to its rebound, then the US will continue importing lower inflation, giving the Fed no choice but to further delay any assessment of higher interest rates.

Geopolitical catalysts drive stocks & bonds

The overnight announcement from president Obama authorising air strikes against ISIS militants prompted further declines in bond yields, while further eroding global equities. Both the S&P500 and NASDAQ remain positive on the year, but not the Dow Jones 30. Yet, if this is a selloff that deserves any real attention, then we ought out at least another 3% decline in the S&P500 towards its 200-day-moving average, a technical development not seen since November 2012. Bond yields, meanwhile, may lose further ground until stabilising near the 2.32%-2.33% which is the confluence of the 100 and 200-week moving averages.

Yields vs stocks


Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.