Published: Wed, February 07, 2018
Money | By Michele Stevens

Yields fall from four-year highs as stocks drop

Yields fall from four-year highs as stocks drop

The Dow Jones Industrial Average fell almost 1,600 points for its biggest intraday drop in history in points terms, or more than 6.0 percent, before ending down 1,175.21 points, or 4.6 percent for its biggest one-day fall since August 2011.

This is normal, every day stock market volatility.

The rising debt yields initially were seen as weighing on stocks as investors anxious that higher rates would slow down growth.

Market pros have been predicting a pullback for some time, noting that declines of 10 percent or more are common during bull markets.

"It's likely the pullback has further to go as investors adjust to more Fed tightening than now assumed", said Shane Oliver, Sydney-based global investment strategist at AMP Capital Investors Ltd., which oversees about A$179 billion ($141 billion).

While rising pay is good for workers, it also can be a sign that inflation is coming.

German financial companies were big fallers, Commerzbank and Deutsche Bank were both down over 1 percent.

The Standard Poor's 500 index, the benchmark most professional investors and many index funds use, skidded 113.19 points, or 4.1 percent, to 2,648.94.

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Our long-term interest rates (10-year NZ Government Bonds) have always moved in lockstep with U.S. 10-year Treasury bond yields (refer first chart below).

At the moment, interest rates are incredibly low: Just 1.25 to 1.5 percent.

The immediate catalyst for Friday's sharp decline was the jobs report, which showed the strong USA economy might finally be translating into rising wages for US workers - a sign that higher inflation could be around the corner.

The Labor Department reported Friday that wages had gone up by 2.9 percent in January, compared with a year earlier.

Asian equities fell and USA stock futures headed lower, extending the biggest selloff for global stocks in two years as investors adjusted to a surge in global bond yields.

Investors are also nervous about bond yields as the Treasury is due to significantly increase issuance this year to make up for declining Fed purchases.

The stock market has been unusually calm for more than a year.

The Labor Department reported that the US economy had added 200,000 jobs in January, beating a Reuters economists' poll of 180,000. Experts have been warning that that wouldn't last forever. The decline prompted the creation of special breaks to keep the market from falling too far, too fast. But the 4.6 percent loss for the day was not even close to the biggest.

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Similarly, between May 2003 and June 2006, a 177 bps surge in the UST 10-year yield failed to deter USA equities from notching up 32 per cent gain. A drop of 10 percent from a peak is referred to on Wall Street as a "correction".

That was the reason why bonds yields had soared in many European economies such as Italy and Greece during the debt crisis a few years ago. The San Francisco bank also agreed to remove four directors from its board.

The pound fell 0.1 percent to $1.4109.

The reason for this very high historical correlation is that foreign investors have held in excess of 60% of NZ Government bonds on issue and they tend to buy and sell NZ bonds in tandem with their U.S. bond buying and selling. Only days after the Fed stated: "Inflation on a 12-month basis is expected to move up this year and to stabilise around the Committee's 2% objective over the medium term", the non-farm payrolls report provided forward indication that consumer prices are headed up "this year".

Darrell Cronk, head of the Wells Fargo Investment Institute, said an extended period of low interest rates has helped create the uncertainty.

Gold lost 0.1 percent to $1,331.67 an ounce. And earnings growth expectations for this year have recently pushed up to 16% as tax cuts get factored in. Copper rose 3 cents to $3.22 a pound. Leading political parties in Germany, which is the largest economy in Europe, have struggled to form a government.

The Bloomberg dollar spot index was up 0.1 percent.

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