Growth concerns bring back negative equity-bond correlation
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Current market commentary
After the stock markets staged a V-shaped recovery and ended August largely on a positive note, there was a trend reversal recently. Negative economic surprises intensified growth concerns and led to falling equity markets and interest rates. Yields on 10-year German government bonds recently fell below 2.2%, the lowest level since January. Accordingly, defensive and interest-sensitive equity sectors such as utilities and real estate companies have recently been ahead. Gold also benefited from falling yields and is now close to its all-time high. Cyclical sectors such as automotive and semiconductor companies, on the other hand, have recently lagged behind. The further direction of the market is likely to depend largely on how the central banks react to the increased probability of a growth slowdown and on the new insights gained from the TV debate between the US presidential candidates Harris and Trump on 10 September.
Short-term outlook
The next two weeks will be dominated by central banks. The ECB meets on 12 September and the market is expecting a 25 bp cut. The US Federal Reserve and the Bank of England will follow on 18 and 19 September. Market expectations for the Fed are between a 25 bp and 50 bp cut. In addition to presidential elections in Jordan (10 September), Romania (15 September) and Sri Lanka (17 September), state elections will be held in Brandenburg on 22 September. On the economic front, US consumer and producer price inflation (Aug.) on Wednesday and Thursday and initial jobless claims (7 Sep.) on Thursday will be key. Eurozone industrial production data (Jul.) and preliminary consumer confidence from the University of Michigan (Sep.) will follow on Friday. Next week's focus will be on US retail sales (Aug.) and eurozone inflation data (Aug.).
Growth concerns bring back negative equity-bond correlation
- US equities and US Treasuries have recently become less correlated as growth concerns, rather than inflation fears, have become the focus of market attention. The correlation between the two over the last 60 days has recently turned negative.
- While in April of this year, only one interest rate cut was priced in by the end of the year, the market now expects the
Fed to cut rates more than four times. However, if economic data does come in better than expected, there is a risk that the correlation will turn positive again.