Business

Dow plunges more than 1100 in wild Monday

Dow plunges more than 1100 in wild Monday

The pullback in stocks "is not enough to derail an economic freight train". The reverse should be true!

"The president's focus is on our long-term economic fundamentals, which remain exceptionally strong, with strengthening US economic growth, historically low unemployment and increasing wages for American workers".

The catalyst for Friday's fall appeared to be a government report that showed the strong USA economy might finally be translating into rising wages for US workers.

This created fears that this will cause a spike in inflation, leading to a rise in interest rates.

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 United States bond buying and selling.

But why are rising bond yields hurting equities?

The rout in US stocks is also hitting markets around the world. The Dow's 777-point plunge in September 2008 was equivalent to 7 percent, far bigger than Monday's decline. In economics, that's called inflation. "But over the long term the (bond) sell-off will continue because growth is strong, inflation is rising and central banks are heading towards policy normalisation".

The tricky thing about predicting a stampede out of bonds is that fixed income is, by definition, different from other asset classes. That could be a problem as these investors look at that statement and realize that they have done really well for a long time, but perhaps it is time that they look toward safer investments, especially now that the yield on those safer investments has increased.

Stocks have also been on a tear because they have been one of the only investments with a decent return.

More news: Best Buy will cease selling CDs later this year
More news: TTP bombing kills 11 troops in Swat Valley
More news: Shocking | 21 people contract HIV in UP, after quack uses infected needle

"Stocks look like they are set for a correction of some sorts after huge losses over the last few sessions that has left many bulls anxious that the bull run may have come to an end", said AxiTrader analyst James Hughes. The more the bond yields rise, the more will be this opportunity cost.

No one really knows what a bond bear market would look like, largely because yields have been on a downtrend in the USA for more than 30 years. The BEER ratio (bond yield/equity yield) now stands at 1.85, suggesting that equities are overvalued.

Last week, rising bond yields prompted the Bank of Japan (BoJ) to intervene in the bond market for the first time since July a year ago.

Tuesday's correction appeared to have rectified this aberration.

US stocks have ended their worst week since February 2016, as investors anxious about rising interest rates after a long market boom. After all, the government deficit is soaring because of massive tax cuts, and the Federal Reserve is trimming its nearly $4.4tn portfolio, which contains billions of dollars' worth of bonds acquired in an effort to prop up the economy in the wake of the fiscal crisis. Higher borrowing rates over time could undercut corporate earnings as well as stock prices. Let's unpack what you need to know if you are someone who invests in stocks and bonds for the long-term and mostly tries to forget about the daily turbulence.

However, rising bonds does not always lead to poor equity performance.

Yields on 10-year Treasuries have climbed to a four-year high from 2.40 percent at the start of the year.

"Seeing the 10-year break multi-year highs and the fact that it happened quickly made the market realize there are some real risks out there".

Blackstone Group chief operating officer Tony James said in an interview on CNBC's Squawk Box Monday that stocks were "fully valued" and "you could easily see a 10 to 20 percent correction sometime this year".


  • Faith leaders key in fight v FGM says worldwide  charity

    Faith leaders key in fight v FGM says worldwide charity

    The practice is widespread in Africa and the Middle East but worldwide efforts have led to bans in 18 countries including Egypt. About 10 per cent of women spoke of having frequent urinary tract infections, incontinence, and one case of excessive bleeding.
    Dallas traffic gridlock easing up, new survey shows

    Dallas traffic gridlock easing up, new survey shows

    Motorists in Birmingham spent over 9% of their total drive time in congestion past year , costing the city £632 million. Overall , the USA had 10 of the top 25 cities for traffic and was found to be the most congested developed nation .
    Call of Duty 2018 is Reportedly Black Ops 4

    Call of Duty 2018 is Reportedly Black Ops 4

    Eurogamer is claiming that Black Ops 4 "will dial back to better fit the series' recent desire for a more grounded feeling". We still don't know when an announcement will arrive, but we might know what the announcement will be.
  • Gutsy Woodland rises to Phoenix challenge

    Gutsy Woodland rises to Phoenix challenge

    Last week we relayed a story that Waste Management Phoenix Open officials were expecting record crowds at TPC Scottsdale . On March 29 of a year ago , Woodland released a statement that he and his wife, Gabby, had lost one of their unborn twins.
    Who will be the new offensive, defensive coordinators for Patriots?

    Who will be the new offensive, defensive coordinators for Patriots?

    He cuts a distinctive figure on the sideline, with a bushy beard, backward ball cap and a pencil above his right ear. Caldwell accumulated a 36-28 record in four years with Detroit , but they failed to win a single postseason game.
    United States  starts drawdown of troops in Iraq after declaring victory over ISIS

    United States starts drawdown of troops in Iraq after declaring victory over ISIS

    According to the report, issued by the Pentagon a year ago , some 8,892 USA troops had been deployed in Iraq. Jonathan Braga, the coalition's director of operations, referring to the Arabic acronym for ISIS.
  • Rahul Dravid unhappy with BCCI over prize money allocation

    Rahul Dravid unhappy with BCCI over prize money allocation

    All the players in the squad will receive INR 30 lakh each while all those in the support staff will receive INR 20 lakh each. I don't want to mention names but everyone in the support staff has put in a great effort.
    Red Dead Redemption 2 Battle Royale Mode And Other Big Leaks

    Red Dead Redemption 2 Battle Royale Mode And Other Big Leaks

    Lastly, Rockstar seems to be preparing a companion app for smartphones which will launch alongside " Red Dead Redemption 2 ". This seems fairly credible as GTA V/Online implemented a first-person mode after its transition to current gen consoles.
    It's Here: The First Full Trailer For 'Solo: A Star Wars Story'!

    It's Here: The First Full Trailer For 'Solo: A Star Wars Story'!

    A new character, Qi'ra, played by Game of Thrones star Emilia Clarke , is in the passenger seat of the speeder alongside Han. The title refers to Rogue One: A Star Wars Story , making these spin-offs a kind of sub-series to the main episodes.
  • Strong Earthquake Rattles Taiwan; Reports Of Buildings Damaged, People Trapped

    Strong Earthquake Rattles Taiwan; Reports Of Buildings Damaged, People Trapped

    Scenes of widespread structural damage in the streets have been shown on numerous Facebook live videos filmed by locals. The ground floor of the Marshal Hotel in Hualien county caved in, causing the death of one employee.
    BP says annual profit rockets on higher oil prices

    BP says annual profit rockets on higher oil prices

    Exploration delivered the most successful year for BP since 2004, with around 1 billion barrel of equivalent resources discovered. It does expect long-term earnings to benefit from the reduction in USA federal corporate tax to 21% from 35%.
    Netanyahu: Israel Expects Countries to Tell Truth about Holocaust, Including Poland

    Netanyahu: Israel Expects Countries to Tell Truth about Holocaust, Including Poland

    Like people in other parts of German-occupied Europe , Poles reacted to the mass killing of Jews in different ways. Israeli officials have voiced strong objections to the law, saying it is rewriting history.