Stocks swoon as bonds slump

Jitters have begun to affect stocks following the recent bond-market slump.

The recent slump in the bond markets continued early this week, and the jitters began to affect stocks too. Germany's Dax fell by almost 2% on Tuesday, and is close to a two-month low. Pan-European and UK stocks also lost more than 1%. Meanwhile, the oil price, which hit a high for the year last week, resumed its upward trajectory after a brief correction.

What the commentators said

German bunds have been hardest hit (having been among the most expensive in the first place) and a lack of liquidity "has caused further price wobbles". As for shares, higher borrowing costs could prove a headwind for economies and equities, "especially if they're already looking expensive".

But the market gyrations aren't simply a reflection of the fundamentals. Indeed, according to economist.com's Buttonwood column, they're a reflection of technical issues traders unwinding positions, essentially. Traders always use a mixture of leverage (borrowed money), hedges and diversified positions. When many make the same bet, momentum drives prices in a certain direction, but setbacks tend to be amplified as leveraged speculators scramble to sell off holdings to cover their losses.

The fashionable trades this year have been to short sell the euro, and to be long European bonds and equities, thanks to the European Central Bank's quantitative easing (QE). "All those bets turned sour in short order."

Germany's Dax index was the main victim of the reversal in the weaker-euro trade, said James Mackintosh in the Financial Times. The snapback has also ensured that European car-makers went from being the eurozone's best-performing sector this year to the second-worst. All of this is a reminder that investors should avoid the most crowded trades "and hope the inevitable reverses do not up-end the market".

Recommended

Bonds
Glossary

Bonds

A bond is a type of IOU issued by a government, local authority or company to raise money.
19 May 2020
The MoneyWeek Podcast: let's talk about bubbles
Stockmarkets

The MoneyWeek Podcast: let's talk about bubbles

Merryn and John talk about the many obvious signs of a bubble in certain assets, including tech stocks, TikTok, and stock-trading 12-year olds. It's c…
22 Jan 2021
Eternal growth: how to invest in the future of the drinks industry
Share tips

Eternal growth: how to invest in the future of the drinks industry

Humans have been dabbling in tasty beverages for millennia. Jonathan Compton assesses the key trends in the sector and recommends seven hard- and soft…
22 Jan 2021
Why bonds may not be the safe haven they once were
Investment strategy

Why bonds may not be the safe haven they once were

“De-risking” by shifting your portfolio into bonds used to make sense. But not so much any more, says Merryn Somerset Webb. So what should you do inst…
21 Jan 2021

Most Popular

Why we won’t see a house-price crash in 2021
House prices

Why we won’t see a house-price crash in 2021

Lockdown sent house prices berserk as cooped up home-workers fled for bigger properties in the country. And while they won’t rise quite as much this y…
18 Jan 2021
Prepare for the end of the epic bubble in US stocks
US stockmarkets

Prepare for the end of the epic bubble in US stocks

US stocks are as expensive as they’ve ever been. How can you prepare your portfolio for a bubble bursting?
18 Jan 2021
The best investment trusts to buy for 2021
Investment trusts

The best investment trusts to buy for 2021

Sectors ranging from emerging markets to student accommodation look poised to do well this year, says David Stevenson, as he picks the best investment…
19 Jan 2021