Bonds Fall, Equities to Follow?

Published on: October 12th, 2018

Bond yields are rising worldwide. As QT bites, Term Risk Premium is beginning to respond. Equities won’t like it, but will they pre-empt the bond bear and stop it in its tracks?


  • AS
    Armando S.
    12 October 2018 @ 19:01
    I thought the NYFANG index/futures were silly, but could be an interesting way to look into playing a short. NYFANG futures now have agreement between stretched valuations plus negative trend/momentum. Negative on all major momentum signals such as 10/100 crossover, 200day MA, etc. (whereas s&p and and nasdaq still have some time before some ma crossovers turn negative).
  • RK
    Ryan K.
    12 October 2018 @ 19:14
    Why is it that lower stock prices create tighter financial conditions?
    • JB
      Julian B. | Contributor
      14 October 2018 @ 22:17
      Hi Ryan, essentially financial conditions indexes contain 5 metrics: short term rates, long term yields, an FX element, stocks and credit. So if stocks fall all, then other things being equal, financial conditions tighten. I'm not sure if you were a subscriber at the time but we covered this topic quite extensively in the June 2018 Meeting of Minds.
  • J
    Jim .
    13 October 2018 @ 01:00
    Very timely and well thought out. It would be interesting to get an bond update from Raoul given the recent sell off in the bond market to get the other half of the Macro Insiders perspective. Great analysis!
  • BA
    Bob A.
    13 October 2018 @ 05:18
    My base case is that we will see a surprising number of earning misses. However, the real issue will be the chorus of concerns expressed in forward guidance. If this scenario does develop, I think it will cause a further market decline and serve along with the upcoming mid-terms as the dominant market catalyst until the December Fed meeting. . Our Wall of Worry is getting crowded.
  • TR
    Tom R.
    13 October 2018 @ 13:11
    Sincerely appreciate the update Julien, could I trouble you expand on your final comments concerning paring US equity longs? As you rightly point out, we’ve had some sizable capital allocation out of European and EM equities. While I thoroughly agree that a collapse in US stock markets will take everyone else with them, at what stage do EM (in particular, rather in Europe in my opinion) equities become attractive vs US? Thanks
    • JB
      Julian B. | Contributor
      14 October 2018 @ 22:10
      Hi Tom, re US equity longs, while I believe there's a decent chance of a short term bounce, off oversold conditions, it should be used to cut back on longs. As I discuss in the piece, US financial conditions need to be tighter period end of story! In theory, that tightening could all be delivered by higher rates or yields. But we all know that in that process equities will take some of the strain. In that sense, the dip of the last week is just a foretaste of what is to come. A couple of months ago, in a prior post I explained I use a simple metric for the S&P, which works like a charm. You buy the market when the 20 week moving average crosses, the 50 week to the upside and visa versa. This recent correction, has killed momentum, which suggests that unless it reverses immediately the moving averages could cross to the downside early next year. At which point, you should be prepared for a much more significant drop in stocks. In terms of EM, if we use EEM historically the dips are binary i.e. 30% ish or 55-60%. We aren't even down 25% yet and my gut suggests this won't be a 30% drop.
    • JQ
      JACK Q.
      14 October 2018 @ 14:55
      i'd still be patient with EM/European equities until she really hits the fan. Meanwhile i've been pairing longs with a little tech exposure for the RV play and anticipate the sell off. But Julien be helpful to hear your thoughts as well
  • MS
    Mark S.
    15 October 2018 @ 15:01
    Both you and Raoul have indicated that when the Renminbi crosses the 7.0 that there will be increased volatility. Can either of you provide more meat as to what that will look like. Equities? Specific currencies that will be more impacted than others etc
    • DY
      Dmytro Y.
      20 October 2018 @ 16:31
      Wow Julian, so you see a lot more downside risk to EM equities and currencies even after they fell substantially so much already...?..
    • JB
      Julian B. | Contributor
      17 October 2018 @ 16:41
      Hi Mark. As we discussed in the piece, we believe financial conditions need to tighten and a stronger dollar would be one way. So far that is being prevented because the Chinese are holding the peg in USDCNY just below 7. But if an when that level goes, I believe the risk is we could see a rapid USD acceleration. In that scenario, US equities will suffer but EM equities could really get crushed. As for which currencies move the most? My bet would not be EURO but EM and even EM Asia, which up until now has been pretty stable.