A necessary consolidation

A bigger factor underpinning our constructive view is positive corporate fundamentals
Chief Investment Office06 Feb 2018
  • Global equities corrected on inflation and rates concerns.
  • The US Treasury 10-year yield is not expected to breach 3%.
  • Stay constructive equities on robust earnings momentum.
Photo credit: AFP Photo

The spectre of sharply-rising rates triggered broad-based sell-down in risk assets last week (ended 2 February), as the S&P 500 Index lost 3.85% – its first weekly decline in 2018. The Euro Stoxx 50 and Nikkei 225 Index were also down 3.4% and 1.51%, respectively, while the MSCI Asia ex-Japan Index lost 2.92%. The consolidation came as the latest US nonfarm payrolls data was better than expected, at 200,000 in January (vs. the consensus forecast of 180,000). More importantly, the average hourly earnings gains of 2.9% y/y was the highest since 2009. Not surprisingly, the knee-jerk reaction was on fears that inflation is back, thus the need for the US Federal Reserve to raise rates faster and more than their earlier guidance.

But hold on a minute.

Yes, bond yields have been rising due to falling unemployment and rising wages. And yes, the recent rebound in energy prices has also added fuel to the rising rates argument. But to argue that this marks the start of a secular bear market for bonds would be a bit of a stretch. We believe that the US Treasury (UST) 10-year yield will not breach the 3% mark in the coming months. Click here to download the PDF.

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