Global stocks extend selloff, Treasury yields retreat from near four-year highs

Global stocks extend selloff, Treasury yields retreat from near four-year highs

Bulls argue that strong USA corporate earnings, including a boost from the Trump administration's tax cuts, will ultimately support market valuations.

Stocks haven't suffered a 5 percent drop since the two days after Britain voted to leave the European Union in June 2016.

Now, investors are suddenly skittish. Historically, the stock market has gained 8 percent, on average, in a year.

The drops come after Wall Street suffered its worst percentage fall since August 2011: the Dow finished 4.6%, or 1,175 points, lower on Monday.

"This is a reality check that the market was price to a perfection that didn't exist", says Swonk.

USA stocks were trading lower in early afternoon on Monday as bond yields continued to hover near multi-year highs and losses in energy and financial stocks weighed.

The dollar index .DXY rose 0.49 percent, with the euro last EUR= up 0.06 percent to $1.2375. Last week, the Fed hinted it saw inflation reaching its 2% target over the medium term and the jobs report showed wages were picking up a bit faster than expected. But once investors think that the inflation threat is real, they will pull out of stocks and pour into the few investments - such as gold and other commodities - that do well in an inflationary environment.

In recent weeks, the shift in sentiment has played out across the world's largest financial markets.

"The market is looking for a new sustainable valuation level for both stocks and bonds, and that to me is the underlying catalyst", said Jim Paulsen, chief investment strategist at Leuthold Grup in Minneapolis. The dollar has slumped.

Beckham praises Manchester United's new signing
That defeat brought an end to their 18-game unbeaten run and was followed by an FA Cup reverse to West Brom at Anfield. Who are you backing? Hugo Lloris and Christian Eriksen are both available for selection after recovering from the flu.

"People are anxious about inflation", he said. The market hasn't gone through a 10 percent drop since early 2016, when oil prices were plunging as investors anxious about a drop in global growth that would hurt demand.

"A strong currency keeps a lid on inflation, which in turn helps keep interest rates low", she said. If bond yields start to rise, investors will want to take some of their money out of stocks and put it into safer bonds.

Stocks are getting pummeled at the moment. And oh, there's also Trump's tax cut - which had already prodded several U.S. companies - Walmart, AT&T, Wells Fargo, etc. - to pass some on onto their employees in the form of pay hikes.

Jim O'Neill, Former Commerce Secretary in the United Kingdom government, on Monday said the U.S. is growing and the central bank may need to tighten monetary policy faster than the market has perceived.

Central banks led by the Federal Reserve have been gently tightening - withdrawing stimulus - as concerns grow that inflation is returning.

The downturn promised to raise fresh anxieties among Americans who've seen their retirement savings climb steadily higher over the past year.

"Global growth feels more powerfully co-ordinated than it has in a long time and inflation remains low", said Carl Tannenbaum, chief economist at Northern Trust and a former Chicago Fed staffer. There are also concerns over a possible spike in inflation after the Budget proposal to hike minimum support prices (MSP) of crops. Unemployment is at a 17-year low, hiring is strong and growth is very solid (and expected to pick up more this year). Stock prices, as representing an estimate of the current value of future profits, should automatically rise as rates decline. The central bank has been unable to significantly raise its interest rates over the past decade, fearing it could stymie the economic recovery and perhaps cause prices to fall.

The assumption of underlying USA economic growth at 2.5 per cent, stable inflation around 2 per cent and the return of "bear steepening" in the U.S. treasury curve could easily set a target of 10-year bond yields over 5 per cent in the next year, close to peak levels prevailing before the 2008 crash and roughly double where they started this year. However, with the Fed soon to be dominated by President Trump appointees wedded to a low interest rate policy, I am not holding my breath that the Fed will make the right policy choice.

Fears of contagion risk have subsequently spread to equity markets with the S&P 500 suffering its worst weekly performance in two years last week, falling 3.9%, while the Dow Jones lost 4.1%.