Just as it was beginning to look like the bond market’s luck was finally running out, President Trump made some remarks that all but guarantee that the bond rally will go on for a little while longer.
Investors started last year full of optimism and ended it surrounded by doom and gloom. This year seems to have started in a bleak mood. So how likely is it that it will end on a positive note?
The list of reasons to worry in the market is growing longer by the day, and investors keep taking money out of risky assets – among them, European ones.
The phenomenon has been dubbed an “exodus from Europe” by analysts at Bank of America Merrill Lynch, who say there is “no surprise that the outflow from European high grade and high yield funds has been much more sizable than outflows from emerging markets debt funds.”
Last month has become known as Red October, not so much as a hint to the film starring Sean Connery as the commander of the defecting Soviet submarine by that name, but sadly, as an accurate description of the dominant colour on trading screens around the world.
The Halloween effect is a well-known seasonal quirk that pushes stock prices up between October 31 and May 1. After a horrible October for stocks, investors are anxious to know whether the market rout is over or it has more to run.
There is one indicator that could provide some clues. We’ve spoken about it before on this website. Bank of America Merrill Lynch’s Bull and Bear indicator triggered a “Sell” signal back in January of this year, and it is now close to a “Buy” one – although not yet.
It’s hard to find a more bullish start to a year than this one. There were “blockbuster” inflows of capital into stocks, as well as corporate and emerging markets bonds, according to the latest analysis by Bank of America Merrill Lynch.
There is a widespread view that the Federal Reserve will have to raise interest rates at a steady pace this year, because it cannot afford to fall behind the curve.
I would argue that it has already fallen behind the curve and has no choice but to remain there. And it is not the only one in this situation. All major central banks are playing the same game; they have no choice.
The air came out of the bond bubble last month, when bond funds recorded the highest five-week outflows in three years and a half, according to capital flows data analysed by Bank of America Merrill Lynch economists.
You could argue that those protesting against trans-Atlantic free trade agreements are die-hard socialists who prefer to keep Europe’s sclerotic status-quo and don’t want change.
Or you could wonder if they have a point. Their protest isn’t as much against the trade agreements per se, as against increasing dominance by big, multinational companies that have as much cash as a medium country’s GDP and so much power they sometimes bend governments to their will.
As investors ponder whether to “sell in May and go away,” strategists say we’ll either see a “summer of stocks,” or a “summer of shocks.”