Market Musings 250525:
The bond market is now in charge
Podcast this week:
US growth concerns and the attractions of infrastructure
In this podcast, Edmund Shing, Global Chief Investment Officer, discusses the potential disconnect between the stock market rebound and the risk of US economic growth slowing down.
Biggest risk to global stocks? The US bond market
The biggest concern of investors today should be the bond market. The direction of the bond market will largely determine trends in stock and FX markets over the next few months.
The concern? That the “beautiful big tax bill” proposed by the Trump administration and passing through Congress currently could potentially worsen the US government debt burden by reducing tax revenues, without a sufficient reduction in federal spending to offset this. The resulting gap would need to be filled by even more issuance of government debt in the form of bonds. This, on top of what is already a huge $9 trillion issuance program to roll over existing maturing Treasury bonds and to fund the existing budget deficit.
While the ultra-long 30-year US Treasury bond yield has risen to a new decade-plus high of over 5%, thus far the benchmark 10-year Treasury yield has remained reasonably calm at around 4.5%.
Were this 10-year yield to rise above 4.8% for an extended period, then I would expect pressure on US stock valuations, given that the S&P 500 forward P/E has recovered to a relatively expensive 21x during the current rebound.
At least market volatility is cooling
Trump continues to fan the flames of global uncertainty with further pronouncements on tariffs, most recently threatening a 50% tariff on EU exports to the US and also heavy import tariffs on Apple products (unless Apple significantly increases domestic US iPhone production).
Nevertheless, market volatility in stocks, bonds and FX are all declining in a classic reversion to mean pattern. Markets seem to be taking Trump’s announcements more in their stride, perhaps expecting that much of these extreme measures will never be implemented in the end (“the art of the deal”).
The combination of lower volatility, a weaker US dollar, and the US economy avoiding recession would be a positive cocktail for stocks, corporate bonds and commodities.
Stock markets already price a relatively optimistic outlook
European and UK stock markets hover very close to their all-time highs. In fact, in spite of the environment…
