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Cliff-hangers

Published Thursday, May 7th, 2015

The financial markets are uneasy. There is movement in the bond markets and when that happens the waves spread to encompass others. Bond yields are on the rise. The benchmark 10-year Bund has moved from a record low yield of 0.05% to 0.6% and other government bonds are moving in sympathy. It may simply be a small adjustment from an unsustainable low or it may reflect a change in inflation expectations.

If it is the latter a key factor has been oil prices which have risen close to $25 bbl from their lows. Iron ore and copper prices are on the rise as well. However sceptical experts in oil, iron ore and copper may be about the “stickiness” of the rise bond investors cannot ignore what has happened. The fall in commodity prices has been a key factor in the “deflation” debate. If they rise it brings on inflation which is a lead indicator for the direction of interest rates.

Stock markets are also uneasy partly because of the developments taking place in the bond market but because of inconsistent economic data and also stretched valuations. Janet Yellen added to nerves yesterday saying in her low-key way that “equity market valuations at this point generally are quite high”. She also warned of the dangers of “a sharp jump in long-term rates” when the Fed decides it is time to begin raising rates.

to read the rest of the report, please click here

Posted by David Hufton