Daily Commentary BY THE CURVE TEAM –

Coincidence or Corollary?

8th of February, 2018

Another night of volatile and interesting price action has thrown up a number of compelling questions about both the current state, and future direction of markets and interest rates. While there are many theories out there, the big question remains, what is the core driver behind the sudden upheaval and spike in volatility?

Despite being in the middle of a synchronised upswing in global growth, of which appears on a stable footing for the time being, markets find themselves in a funk. Many correlations amongst different markets and a number of long term trends have broken down in recent days. The question is are all these things related or is it simply a coincidence?

Large movements in equities markets, particularly in the US, have stolen all of the headlines in recent days. They are the most visible and widely followed by the public so that is probably justified. However, equities markets are only the latest market to break from their recent trend. Up until the recent malaise, equities had been on an steady march higher month after month.

Around the same time that the US equity markets peaked, we finally saw the USD bounce. The USD index, which measures the USD against a basket of currencies, had been on a steady decline since peaking late in 2016. The timing of both the USD move and equity market pull back could easily be seen as a coincidence or that one was driving the other.

The market however that was on the move well before both the equity and currency markets was the bond market. After shooting higher following the election of President Trump, longer dated rates in the US had largely been trading sideways since late 2016.

Since the start of the year, the US 10 year bond rate has been slowly grinding higher from the middle of that long run trading range, and in the process has broken out of a 10 year downtrend. Bond rates, or the price of money, especially in the US, are one of the most important indicators as their impact is the most widespread.

While it is still too early to tell how this latest spike in volatility will go, one place I would be keeping a close eye on is the bond market. If long interest rates continue to climb, the outlook for markets and the broader economy is likely to shift significantly.

David Flanagan

Director - Interest Rate Markets