Macroscope | The bulls are back, thanks to better-than-expected market news. But there’s little support for their optimism
- Expectations have so much influence over investors that a slower contraction than anticipated has boosted markets
- They’ve gotten ahead of themselves: there’s little about global conditions to indicate the economy has hit bottom
In financial markets, expectations are crucial. Bad economic news can be treated as good news if the data comes in better than expected.
Last week, the publication of an index of global manufacturing activity, produced jointly by JPMorgan and IHS Markit, showed that output in October contracted for the sixth straight month as the trade war continued to take its toll on the world economy.
However, investors seized on the slower pace of contraction, with the index rising for the third consecutive month, suggesting that the manufacturing downturn may have bottomed out during the summer.
The facts speak for themselves. Since October 8, the yield on the benchmark 10-year US Treasury bond has surged 37 basis points to 1.89 per cent, its highest level since early August. More tellingly, the global stock of negative-yielding government and corporate debt, which had ballooned to a record high of US$17 trillion in August, has plunged to US$12.5 trillion. Even Japan’s 10-year bond yield is threatening to turn positive.
