The View | The fight between bulls and bears over the US economy and markets has just begun
Fund outflows from US equities, rising yields on 10-year bonds and increasing odds of four rate increases this year because of mounting inflation fears have set the scene for a showdown between bulls and bears
The reverberations of the recent surge in volatility in financial markets have just begun.
Despite a strong rebound in US stocks over the past fortnight, international investors continue to withdraw money from the country’s equity funds, with redemptions of US$2.4 billion for the week ending February 21, bringing total outflows since the start of this year to US$22 billion, according to EPFR Global, a data provider. While the threat of higher government bond yields is weighing on US equity markets, European and emerging market stock funds attracted a further US$3 billion and US$5.4 billion respectively last week, according to data from JPMorgan.
America’s debt market is also under increasing strain, with the yield on the benchmark 10-year Treasury bond hovering near the psychologically important 3 per cent level, fuelling speculation that the 30-year-long bull market has finally come to an end. Following last Wednesday’s publication of the hawkish minutes from the Federal Reserve’s January policy meeting, the odds of four interest rate increases this year – at least one more than the Fed anticipates – have shot up to 27 per cent.
Add in an inflation scare and mounting concerns about the US fiscal position following the enactment last December of sweeping tax cuts and a deficit-swelling budget deal agreed earlier this month, and it is clear that US markets and the economy have become the battleground between bulls and bears.
While overstretched valuations in US stocks and bonds were a focal point of investor anxiety long before the bout of turbulence swept through global markets earlier this month, the fact that the trigger for the surge in volatility – a sharper-than-anticipated pickup in wage growth which accentuated fears about inflation, pushing up bond yields – emanated from the US has sharpened the focus on financial and economic developments in the world’s largest economy.