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Chinese news rattles markets

By David Morrison  |  10/01/2018 15:33

Stocks lurch lower after Chinese officials recommend “slowing or halting” the purchase of US Treasury bonds. The fourth quarter earnings season also gets underway this week.

Stock indices lurch lower

European equities and US stock index futures took a sudden and unexpected lurch lower early today. This came after Bloomberg reported that Chinese officials reviewing the country’s FX holdings were recommending “slowing or halting” the purchase of US Treasury bonds. The move could be linked to recent trade tensions, although there has been no confirmation of such a decision. Today’s sell-off was most pronounced in the German DAX and US majors, and followed a strong session on Tuesday which saw the Dow and S&P500 once again close out at fresh record highs.

Yields spike higher

US Treasury bonds fell sharply leading to a spike higher in yields. This came just a day after the yield on the US 10-year Treasury broke above 2.5%, its highest level since last March. The move suggests that an upside breakout in yields is on the cards which some observers believe could signal the end of the 30-year bull market in bonds.

Earnings season kicks off

The fourth quarter earnings season is getting underway with Bank of America and Blackrock due to report tomorrow while we end the week with JP Morgan, PNC Financial and Wells Fargo. This earnings season could turn out to be more important than any in the last eighteen months or so. For a start, the major US stock indices are trading at all-time record highs. Yet it’s apparent that the central bank stimulus which did so much to boost equity prices over the past nine years is coming to an end. The general feeling is that this stimulus has worked in the sense that global growth is now picking up in a synchronised way with GDP expansion seen across the US, Europe and Asian Pacific regions. But now we’ve got a situation whereby developed world central banks are reducing monetary stimulus. The US Federal Reserve and the Bank of England are actively raising interest rates while last month the Bank of Japan reduced its balance sheet for the first time since 2012. The European Central Bank continues to add stimulus, but at the slowest rate since it began its Asset Purchase Programme (APP) back in March 2015. Economists expect the ECB to end its APP in the fourth quarter of 2018. This is despite ECB President Mario Draghi’s insistence that the central bank reserves the right to extend its bond purchases in both size and duration should this be warranted by financial conditions.
Corporate earnings have also been a major driver of the equity bull market in recent years while Trump’s tax reforms (passed by Congress last month) are also having a positive effect on stocks. US companies are expected to use any tax savings to engage in stock buybacks and dividend pay-outs. In other words, all good reasons for investors to own US stocks. Taken all together, if US earnings come in as expected, then equities should continue to rise – other things being equal. But it may not take many disappointments, or much in the way of negative forward guidance, for the gloss to come off global stock indices. 

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