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It's about earnings, not Treasury yields

06 February 2018

Germany's DAX index dropped 1.7-percent, while France's CAC 40 Index declined 1.6-percent.

Japan's Topix index declined 1.9 percent and the Nikkei 225 Stock Average sank 2.2 percent.

Data on Monday showed that US services sector activity raced to a near 12-1/2-year high in January, buoyed by robust growth in new orders.

It also threatened to deprive President Donald Trump and the GOP of a favorite talking point at the nascent stages of the 2018 midterm campaign.

The strengthening economy is translating into not only stronger profits for companies but also better sales, something that investors have been keen to see. At some point, the foreign investors will not see the merits for staying in the NZ bond market and will sell out.

Emerging market equities posted another strong month, supported by a weaker greenback with the MSCI Emerging Markets Index returning 8.4% in dollars, and 41% over the past year. Jerome Powell will take over for Janet Yellen on Monday as the new Federal Reserve Chair. Markets rallied on the back of huge central bank super-stimulus and now that boost is being withdrawn, it is game over for the exultant tide. But the Fed has indicated it intends to raise rates three times this year, so rates would end the year at 2.25 percent. "The pullback is likely to be just an overdue correction, with say a 10 percent or so fall, rather than a severe bear market - providing the rise in bond yields is not too abrupt and recession is not imminent in the USA with profits continuing to rise".

The yield on the 10-year Treasury note climbed 7.9 basis points to 2.852 percent, the highest since January 2014.

With the mining boom now behind us, our major export market slowing and housing finance now past its peak, our economy and our stock market remain vulnerable to any shift in global sentiment.

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Rising rates have myriad consequences, including making it more expensive for companies and individuals to borrow money, like for buying a home or a auto.

The softness of markets over the last few days is down to one thing.

"People are anxious about inflation", he said. That is well below where most experts believed it would begin to provoke higher wages and inflation. For people buying equities, that should be a positive. The Dow's fall ranked as its 100th biggest, while the S. & P. 500's slide was the 127th biggest in the index's history, according to S & P Dow Jones Indices. The technology-laden Nasdaq was down six of its last eight sessions as markets opened Monday.

"We expect the correction in Australia will be mainly felt in high flying areas like the resources sector as well as many lower quality smaller companies where we have seen excessive speculation". By that measure, the price-earnings ratio, the S&P 500 is close to the most expensive it's been in many years, adjusted for inflation.

"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". While Japanese, European and Australian shares had decent corrections throughout the year of around 5 to 7%, the U.S. share market as measured by the S&P 500 saw only very mild pullbacks of less than 3%. "It's not setting some new kind of record other than its rapid ascent".

How high rates and yields are set to surge is the US$15 trillion dollar question investors should be asking themselves right now.

They last traded at 2.766 percent.

Utilities, Real Estate Investment Trusts and other reliable, dividend-heavy stocks that resemble bonds are being hit by the rise in bond yields. The two most recent expansions in the United States crashed to their respective ends not because the Fed slammed the brakes on an overheating economy, but when asset bubbles burst - tech stocks in 2001 and housing in 2007.

It's about earnings, not Treasury yields