The ‘Marking To Misery’ Trade Has Accelerated

The “marking to misery” trade has accelerated.

Earlier this month, BofA slashed their year-end yield forecasts across the board, citing a number of factors, not least of which was the sudden escalation in the trade conflict, which, in addition to driving investors into havens, threatens to undermine global growth. “Green shoots”, meet Roundup.

But it wasn’t all about trade. “It would be simplistic to blame these forecast revisions purely on the latest chapter in the trade war saga”, BofA said, adding that “central banks globally have shifted to a dramatically more dovish tone and inflation has continued to disappoint — surprisingly so in the US, and sufficiently in the Euro Area to finally appear on the ECB’s radar screen.” They also lamented that Brexit “and related uncertainty” is still unresolved.

Read more: Misery.

Over the past three sessions, the reality of the trade war has seemingly begun to dawn on market participants. Chinese state media continues to pound the resistance drum and Tuesday brought fresh threats about the economic weaponization of rare earths. “It’s not hard to answer the question whether China will use rare earths as a weapon to retaliate during the trade war”, a Wednesday commentary in the People’s Daily reads.

On Monday in Japan, Trump reiterated that a deal is not close.

And so, benchmark yields in the US dove to fresh “since 2017” lows on Tuesday and the rally continued apace Wednesday, flattening the 3-month/10-year curve further, which in turn stokes recession fears in a vicious loop. The disconnect between bonds and stocks is glaring and “catch down” chatter (for equities) is once again all the rage.

The bond rally is of course global, just as it was two months ago. The May growth scare is turning out to be more dramatic than its March predecessor. Bund yields are at -17bp (bottom pane). Unemployment data out of Germany on Wednesday painted a disconcerting picture.

In Australia, 10-year yields continue to tumble. RBA forecasting is just a race to the bottom now. Days after Westpac’s Bill Evans tipped three rate cuts, JPMorgan said the central bank would likely need to cut the cash rate 100bp by mid-2020. “A number of developments in recent months suggest the RBA is unlikely to achieve desired macro-economic outcomes with only 50bp of easing”, the bank wrote. On Wednesday, 10-year Aussie yields fell “down under” the cash rate for the first time since 2015 (top pane in the visual).

Meanwhile, 10-year yields in South Korea fell below the BOK rate on Wednesday. Foreign investors snapped up a net $1.18 billion of South Korean debt on Tuesday (the most since January 2018) as the flight to safety and a slumping currency enticed.

Yields in New Zealand fell to a fresh low on Wednesday as well.

On assumes bonds are simply out ahead of equities when it comes to pricing in the hit to growth from the worsening trade conflict. That seems like the most simplistic take, and there’s elegance in simplicity. To the extent that’s accurate, it presages further losses for stocks.

It’s now exceedingly difficult to ignore what bonds are trying to “say”, and one can only hope Trump is listening – if not for the world’s sake, than for his own…


(Deutsche Bank)

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