A chill wind is ruffling markets. Treasuries are balanced precariously near a putative three-decade support level. The resurgent dollar is blowing a multitude of trades off course. And bumper earnings have failed to excite stock bulls en masse.
It’s all creating havoc for some of the most popular investments on Wall Street -- from momentum stocks to emerging markets -- amid fears over the longevity of the business cycle.
“The sharp sell-off in rates has hijacked market sentiment,” strategists at Toronto-Dominion Bank including Richard Kelly wrote in a recent note. “The 3 percent level on the U.S. 10-year does not have any magical properties, but market participants are trying to navigate a global markets regime shift with a toolkit of mostly unstable correlations.”
Here are some questions investors are wrestling with right now.
Is The Business Cycle Peaking, Presaging Recession And Defaults?
Warning signs continue to flash in dollar interest-rate markets. Even though the Treasury cash curve steepened this past week, the swaps market is already signaling an end to the Federal Reserve’s rate hike cycle in 2020, or early 2021.
“The market is barely pushing up the level that it prices for peak rate but is now contemplating that peak coming sooner,” Kit Juckes, a global currency strategist at Societe Generale SA, wrote in a recent note to clients.
The first half of 2020 will usher in the start of the next “major” default cycle, according to strategists at Deutsche Bank AG. They cite pressure on the Treasury curve to invert as a signal the U.S. economy risks overheating amid elevated corporate leverage.
Their bearish missive echoes warnings from a slew of Wall Street counterparts of late that the end of business cycle is nigh with higher volatility and lower returns ahead.
Why Have Earnings Beats Failed To Lift Stocks?