Tags: bond | chaos | traders | economists

Bond Chaos Is All Because Traders Didn't Listen to Economists

Illustration depicting the words bond yields with a large question mark

(Andre Lefrancois/Dreamstime)

Friday, 05 October 2018 08:16 AM Current | Bio | Archive

Bond markets have recently been getting very agitated because the U.S. economy and the Federal Reserve have been behaving exactly as economists said that they would behave.

The fact that bond markets have sold off on the back of entirely predictable behavior is a sad commentary on the failure of bond traders to listen to economists. The secrets to a long and prosperous investor’s life is always to listen to economists.

Jobs Friday

Meanwhile, the U.S. employment data will be somewhat distorted by bad weather. The storms on the East Coast will tend to reduce employment and increase average hourly earnings relative to non-weather affected data. Employment will be weaker than otherwise because people could not get to work.

The average hourly earnings may be higher than otherwise because average hourly earnings are an average of hourly earnings and are not now, and never have been wages.

Many people who are paid by the hour and who could not get to work because of the storms will not get paid at all. That people tend to be low paid in the first place. People who are paid salaries, who tend to be paid above average, will still get paid. The average is thus distorted higher.

Pence Remarks on China

U.S. Vice-President Mike Pence, in remarks at Washington’s Hudson Institute, has accused the Chinese of meddling in the midterm elections in a rather strongly worded speech.

His speech reads: “… There can be no doubt: China is meddling in America’s democracy. As President Trump said just last week, we have, in his words, “found that China has been attempting to interfere in our upcoming [midterm] election[s]…”

Reuters reported: “… In what was billed as a major policy address, Pence sought to build on Trump’s speech at the United Nations last week in which he accused China of trying to interfere in the vote that will determine whether his Republican Party will keep control of Congress. Neither Trump nor Pence provided hard evidence of meddling by China, which last week rejected the president’s allegation. Pence’s speech at Washington’s Hudson Institute marked a sharpened U.S. approach toward China going beyond the bitter trade war between the world’s two biggest economies.”

For investors, it could be of interest keeping in mind that this may keep alive the legitimate fears of a full-blown trade war risk between the U.S. and China.

In the meantime, it becomes clearer that the Trump tariffs (or tax increases) on trade are limited to being "moderately negative" for China.

WTO Reform Discussion

On the subject of trade, Canada has announced that a group is to come together to discuss reforming the World Trade Organization (WTO) in late October in Ottawa, Canada.

The European Union (EU), Australia, Japan, Singapore, and South Korea are expected to attend. That group will not include the United States and China, for the moment at least, in the reforms discussion process presumably because the views of the United States and China on reforming the World Trade Organization (WTO) are not necessarily viewed as being helpful.

The U.S. and China will take part in the discussions later.

President Trump has made no secret of his dislike of multilateral international trade deals and has threatened to pull the United States out of the WTO "if they don't shape up."

Emerging Markets Stocks Continue their Slide

Selling in emerging market (EM) stocks failed to ease so far today, Friday, after yesterday EM stocks had their worst day since February.

The sharp drop was blamed on investor concern mounting about the pick-up in global developed market bond yields as well as on the strong dollar.

MSCI’s broad EM stocks gauge, which tracks equities in two dozen countries, dipped 0.65 percent so far today, Friday, adding to the 2.4 percent sell-off to 1,010.14 yesterday.

By the way, the index was at 1,273.07 on January 26 this year.

EM equities entered in “bear market” territory by mid-August, having fallen more than 20 per cent from its January peaks. Since then, there has been a modest rebound; however, MSCI’s index is now heading back towards its 2018 lows.

In my opinion, I would stay away from “buying the dip” in emerging market stocks (EM) and wait until we have more clarity on, among a lot of other things, how the threat of a full-blown trade war between the U.S. and China could develop.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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The fact that bond markets have sold off on the back of entirely predictable behavior is a sad commentary on the failure of bond traders to listen to economists. The secrets to a long and prosperous investor’s life is always to listen to economists.
bond, chaos, traders, economists
Friday, 05 October 2018 08:16 AM
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