The S&P 500 fell 2.9% on Wednesday, the second occurrence this month, and erased previous gains for the week. The index is down about 6% from highs reached in July. Emerging Markets continue to lag and are down more than 24% from their high set back in January 2018. Gold continues to be one of the best performing assets as it benefits from the big drop in real yields. The Bloomberg Barclays Aggregate Bond Index is up 2% this month.

The key driver this week for markets has been a push to new lows in global sovereign bond yields. The 30-year Treasury traded down to 1.94%, an all-time low after German and Chinese data came in weaker than expected. This came just one day after news that upcoming tariff increases will be delayed for some items and the Consumer Price Index reported a higher than expected reading. The 10-year Treasury is only about 25 basis points from breaching the 2016 all-time low, which many forecasters felt would not be seen again. The 30-year Treasury has fallen more than 50 basis points from a starting point of 2.6% since the Federal Open Market Committee (FOMC) meeting. Despite the low starting point, it is the largest two-week drop in yields since the 2011 European Sovereign Debt Crisis. The much faster drop in the 30-year Treasury vs. the 2-year Treasury is the bond market signaling the FOMC is behind the curve. This sped up following comments made by Jay Powell that the FOMC would need to see  “real economic weakness” to take short-term rates significantly lower.

China has allowed their currency to move slightly beyond the key sentiment level of 7.0 and would be a risk-off for markets should they announce a big devaluation. Argentina elections yielded a surprise outcome and this sent government bonds down 35-40%. Also, the currency fell 25% and the benchmark stock index fell 37% in just one day. The stats show the largest equity drop in the country’s history was a 17-sigma event, meaning it shouldn’t have happened even once in the history of the universe.

The next opportunity for a big shift in the market narrative appears to be at the annual Economic Policy Symposium in Jackson Hole, Wyoming. This has gone under the radar despite only being a week away. Fed officials will get a chance to not only increase their aggressiveness on rate cuts, but communicate their policy toolset, i.e., how far down the rabbit hole they are willing to go during the next recession.

Contributed by | Justin Carley, CFA, Managing Director

Justin is a Managing Director, providing portfolio management and credit analysis for fixed income strategies. He also manages the firm’s multi-manager portfolio strategies and contributes to the asset allocation framework. Justin has more than 10 years of experience focusing on management, analysis and trading of fixed income portfolios. Previously, Justin was a fixed income portfolio manager at American Trust & Savings Bank. Justin has a bachelor’s degree from Truman State University, holds the Chartered Financial Analyst designation and holds a Fellowship in the Life Insurance Management Institute.

Source: BTC Capital Management, Bloomberg LP, Ibbotson Associates.
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