Bears Breaking the Scales
As US markets rally through their reopening after a July 4th hiatus, the economic contrast between the US and Europe hits hard. It’s a bond fest in the Eurozone, with stocks looking at a steepening up-hill battle for gains.
Christine Lagarde, new President-elect of the European Central Bank, may soon press the big red button on interest rate cuts. Faced with tariff threats, Brexit stalemates, Italian debt crises, and the dreaded inverted yield curve, the stock market may either need a cut or full-on resuscitation measures as recession fears weigh in. We don’t want to go there.
It’s mostly the inverted yield curve that has European investors quaking in their boots. Bonds offer a reliable, fixed income. As dark clouds loom over the stock market, stampedes of market players load up on bond funds, driving up their price, and diluting the value for money they offer. Now, connect-the-dots between various bonds yields and you see an inverted curve. Every crash has been preceded by that curve. Gulp.
The curve almost snapped yesterday as both German and French bonds dipped into even lower, negative yields. Hold on though, no panic selling just yet. Yield curves aren’t a perfect omen. Showing us the weight of an investing herd on bond returns, the inverted curve has predicted nine of the last five recessions. As they say, a broken clock is right twice a day!
In sum, sparks have been flying in the European economic machine for a good while. Even as things grind to a breaking point, investors have a new “dove” to rely on as President of their Central Bank. Odds look good for a stock-boosting rate cut, but until then, investors may continue jumping ship to bonds. Are you a follower or a contrarian?