The last time I wrote an Uber bearish note was in December 2015, providing an outlook for the start of 2016. In fact I wrote more than one bearish article warning investors of an imminent market correction and we all witnessed a serious market correction over January and early February. I point this out not to pat myself on the back, but to rather point out that I am not a perennial long-term bear who screams the “sky is falling” while a bull market is in full swing. I am not Marc Faber’s long lost son.
However, I am seeing a mini-version of the factors that concerned me at the end of last year, beginning to surface. A short but sharp correction could be in the offing. I will point out now that following this I think equity markets should be able to surge to new highs, but on the back of only a few select sectors.
So what is so concerning? Firstly, rising bond yields (falling bond prices) across the globe. Technically these are breaking out of large formations that suggest more sustainable moves are likely. This is in keeping with central banks looking to move away from zero-interest-rate and negative-interest-rate policies. As markets begin to sense the slowing of central bank support in debt markets, an exit will occur from arguably the most manipulated bubble in history.
Below we can see US 30-year yields beginning to break through resistance with vigor across 2.5%. The first reaction to this is that it’s a small move off a small base so what does it matter? Well it matters a lot because the world – both at the consumer and government level – are far more indebted than ever before. So only marginal movements in interest rates will cause a more aggressive reaction than at any other cycle that has come before.
Below is a listed ETF in Paris that provides investors a way of short selling German Bunds where a near zero yield is ludicrous. At the shorter duration part of the yield curve negative interest rates are a failed experiment and in time will be proven so. This listed ETF will move in line with direction of Bund yields and as can be seen over the past 48 hours these have now broken higher in a big way.
The last big move in Bunds occurred in May and June of 2015. Below is the German DAX index and this shows the reversal that occurred in that equity market, which it is still yet to surpass despite bund yields falling even further.
Emerging market bonds have now peaked as well. Below is the Emerging Markets Bond ETF and a clear top is in place.
So it is no surprise then that we are seeing some serious market reactions behind the scenes that the major equity indices are masking. While the S&P 500 and DJIA have broadly drifted sideways in the past few months, there has been a lot more action and movement within sectors and stocks. The picture isn’t pretty. This is not dissimilar to what we discovered in late 2015 when deciding how the start of 2016 would play out. The S&P 500 managed to rally while key sectors were heading in the opposite direction.
Naturally defensive and interest rate sensitive sectors are seeing an exodus by investors as they react to higher bond yields. Below the real estate sector and healthcare have completed serious tops, broken trendlines and are in a firm decline.