Stocks reconverge with yields

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.