A fresh mess in US politics will do nothing to take the heat out of surging bond yields, and the ripple effects have clearly spread to Australian equity and currency markets.
With bond yields surging higher every day, at least in part on fears that the US is trapped in a sort of debt doom loop – higher debt means higher interest repayments, which means more debt needs to be issued, which pushes yields higher as debt rises higher still – theAustralian equity and currency markets are feeling the chill of the mess in the US.Ratings companies were already fretting about US government dysfunction.
The most obvious impact of higher yields was Wall Street’s so-called fear index, the VIX, which soared 12.3 per cent on Tuesday night and is up 54 per cent since the middle of September, albeit off low levels., and are now being forced into an increasingly painful adjustment to this higher-for-longer reality.The S&P 500 fell 1.4 per cent on Tuesday night and is now down 7.6 per cent since the start of August. The Dow Jones Industrial Average fell 1.
“The equity market’s current resilience in the face of rising bond yields reminds me very much of events in 1987, when equity investors’ bullishness was eventually squashed,”“And in a further parallel, currency turbulence in 1987 played a key role in exacerbating recession worries for an equity market priced for the start of a new economic cycle.”
Lisa Shallet, chief investment officer at Morgan Stanley Wealth Management, says the combination of the US dollar’s surge and rising oil prices are “creating a toxic brew when combined with” the surge in bond yields. Oliver says the Australian dollar’s fall is primarily a story of rising US bond yields and the Fed’s decidedly hawkish tone, particularly compared to that of the RBA, which
Does a similar fate await us again? SocGen’s Edwards says he’s never seen this level of uncertainty about the economic cycle and doesn’t know if the recession he’s long predicted will arrive.
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