Another Great Piece from IFR news,
Being somewhat downplayed at the moment by the markets is the coronavirus. This perhaps as no new real news has been forthcoming. The situation appears to be contained to the Chinese mainland and particularly around the Wuhan epicenter. Nonetheless it is a dire and serious situation that market’s shouldn’t take for granted will be successfully resolved.
This concern is likely being factored into the bond market as despite the record run in equities and a surprising firming in the recent economic data (ISM and ADP) bonds continue to trade in a very supportive fashion.
The suggestion here is this is mainly due to the widespread market perceptions that global central bank policies will either remain in their current state of abundant accommodation if not see even further policy accommodation (note that Brazil, the Philippines and Thailand all cut rates this week). Earlier this morning ECB President Lagarde lamented the fact that the ECB has “significantly reduced policy scope.” Implied is that Lagarde would like to have the scope to further ease.
Of course, the Fed is likewise biased if they possess wider policy scope. Indeed, the Fed has more or less pledged that they will allow the economy to run hot in their quixotic quest to revive inflation at/above their desired 2.0% target. Such a policy approach very much appears to be the fuel that is feeding the global equity rally. As interest rates are suppressed it serves to increase the multiple that investors are willing to pay for equities. Equities too are encouraged by the idea of letting the economy run hot for its potential to create higher earnings. Contributing to this perception is the evolving national political landscape that suggest that status-quo is likely come the November elections. That is President Trump is reelected and the Congress remains divided with a Republican Senate and a Democratic House. While perhaps equities would thrive on a Republican sweep; President Trump and congressional gridlock is a close second.
While not as ideal a backdrop for the bond market, the market is expected to mainly be a supportive one. This as central banks keep a safety net under it all and as the market stays biased that the probabilities of a downside risk materializing remains high. Also to be considered is the apparent lopsided nature of market flows where global demand for high quality assets dwarfs its supply