Bond yield curve holds back global equity recovery

LONDON (Reuters) – The global equity rally came to a close at the end of the quarter, with warning signs of bond markets, central banker turns, and lingering worries over trade dispelling consensus on the events of the rest of 2019.

The pan-European STOXX 600 Index climbed 12.2% in the first three months of the year, its best quarter in four years, while the S & P 500 is poised to achieve its largest quarterly gain in the first quarter. almost 10 years.

A rebound was expected after the historic defeat in late 2018, but few investors predicted the magnitude of the rebound or the magnitude of the rate reversal by European and US central banks, which would have contributed to feed it.

The majority of gains were recorded in January – between 6 and 8% – according to the Federal Reserve's praise, economic recovery in China and the easing of trade tensions between Beijing and Washington eased concerns over slowdown in economic growth.

In March, however, the pace slowed to 1%, as the euphoria of slowing interest rate increases raised concerns over the Fed's and the ECB's comments on the global economy. to the sluggish growth of the United States and the euro zone.

Now, few are taking a strong position.

"People are wondering if they missed the rally. They think that it makes no sense to invest when the curve is reversed and the economy slows down, "said Willem Sels, market strategist at HSBC Private Banking.

He estimates that global equities could still rise by 5 to 7% with the over-inversion of the bond yield curve.

"The next few weeks will be more volatile, people will worry until the data improves and the first quarter results may not be very good, so we are in a zone of high volatility, "he said.

A February survey of investors around the world revealed a wide range of views on equity developments over the next 12 months, illustrating the lack of consensus on the market.

Take the estimates for the S & P 500: the highest predicting a 25% rise in the index, while the market's most bearish dropped by around 10% by mid-2020.

Europe had a similar disparity, with estimates ranging from 15% to 20% for the STOXX 600.

In the end, the median forecasts for the pan-European companies STOXX 600 and FTSE 100 were comparable to those of the current markets, which suggests that the gains on equities have followed their course.

(Chart: Inventory Survey Forecast – tmsnrt.rs/2Wp4txY)

(Graph: Stock survey forecast 2 – tmsnrt.rs/2Wpouoa)

For an interactive version of these charts, click here:

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The implied volatility of the European and US stock markets, often seen as an indicator of fear, also fell in the first quarter. The fear gauge of Wall Street has more than halved to 13 points from the peaks of December, while the same measure in Europe fell to one-third of its peaks at the end of 2018.

(Chart: VIX Volatility Gauge halved in the first quarter of 2019 – tmsnrt.rs/2V4QE7o)

(Chart: Performance of world market badets 2019 – tmsnrt.rs/2HMUijc)

For an interactive version of these charts, click here:

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PERFORMANCE CURVEBALL

Last week's US bond yields were rounds, which plunged investors deeper into confusion.

With yields on 10-year US bonds lower than three-month Treasury bill rates for the first time in more than a decade, fears of recession have emerged.

But the yield curve of 2 to 10 years has been accentuated, offering conflicting signals indicating that there was no need to alarm it.

After all, the global economy is advancing wisely, corporate profits continue to grow, albeit more slowly, and major central banks are becoming more dovish.

Wouter Sturkenboom, chief investment strategist for EMEA and APAC at Northern Trust, may need months before markets stabilize – and relies on decent macroeconomic data – obligations have been over-played.

"We think government bonds are doing too much right now. It is a vote of censorship towards the Fed and its communication strategy. That's why we are not determined to

(Chart: US yield curve reverses for the first time since 2007 – tmsnrt.rs/2UNVc1P)

To get stocks out of their lethargy, investors need correct macroeconomic data and first quarter results to restore confidence.

"We have made a lot of progress in central bank pricing and, for risky badets to continue to grow in the second quarter, we will need growth to take over," said Paul O. Connor, director of Janus Henderson in the United Kingdom-based multi-badet team.

"The way in which risky badets have begun to react to the yield curve is further confirmation that risky badets have probably extracted as much positivity as possible from lower returns."

But badysts have lowered their earnings guidance for 2019 to a three-year low, and most expect a poor performance season.

Companies listed on the S & P 500 Index should record a contraction in their profits of 1.9% in the first quarter, down from a growth of nearly 17% in the fourth quarter and the worst performance of in recent years, according to I / B / E / S Refinitiv.

European companies listed on STOXX 600 are expected to post earnings growth of 2.1% year-over-year, the slowest since the third quarter of 2017.

After such an acceleration, Justin Onuekwusi, fund manager at Legal & General Investment Management, said he was not too worried that stocks would catch their breath.

"We had such a rebound, but the markets are not going straight. It is inevitable that you get a break, "he said.

(Chart: Global earnings growth on March 29 – tmsnrt.rs/2CKYuMj)