Wednesday May 6

Stocks fall after disappointing private payrolls data. The S&P loses 0.5% to 2,080 and the Dow falls to 17,841. Today’s poor jobs and productivity data continues the trend of weak data that has motivated the recent selloff. As a result, the U.S. dollar index falls 0.7% and the ten year yield increases 6 bp. The ten year Treasury has gained 38 basis points in just three weeks, as Janet Yellen makes a comparison to the taper tantrum. U.S. crude oil continues its rally up to $60.93. The S&P 500 currently trades at a p/e multiple of 17.6 compared to the 5 year average of 14.5.

Janet Yellen comments that share prices are “quite high”. She also warns that there is a risk of a sharp jump in bond yields once interest rates do rise. Yellen states that risks in the financial sector are not particularly elevated. After rates do rise, Yellen expects “term premiums,” or yields on long term bonds to go up, reminiscent to what happened during the taper tantrum in 2013. Yellen insists that the Fed is communicating its forward course of action clearly and early in order to not shock the markets.

Marginal improvements to economic outlooks around the world lead to a selloff in bonds. As a result, yield movements around the world are becoming increasingly correlated. In Australia bond yields rose even as the country’s central bank cut interest rates today. These movements are a result of deflation fears minimizing, in part due to the rally in oil prices. Market inflation indicators, such as TIPS bonds) have risen sharply to reflect higher inflation expectations. In particular, long dated bonds are being sold, and bond funds have experienced $1.8B in outflows in the last five days. Corporate credit is not being sold as heavily as Treasury bonds. According to a strategist at UBS, the selloff has been bigger than it otherwise would have been because of illiquidity in the markets.

With the U.K. election tomorrow, equity, currency, and government bond markets have been pricing in uncertainty in recent weeks. Leading up to the election in 2010, the pound fell 6% against the dollar and it fell another 5% within 12 days after the election as markets reacted negatively to the possibility for a coalition government. This year the pound has only fallen 3.3% against the dollar in the weeks leading up to the election, although it’s possible that the dollar’s recent weakening is a factor. The 3.3% depreciation against the dollar is considered an outperformance compared to the expectations. If conservative candidates win the election, they will push for an exit of the EU, what analysts are referring to as a “Brexit.” No matter the outcome, markets are reacting negatively to the possibility for uncertainty.

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Wednesday May 6

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