Are trade wars rattling markets, or is it fear of another blow-up in Europe?
As the trade war intensifies, developed-world government bonds have sunk to new lows. But the root cause of the markets' jitters could lie not so much in trade as in fears of another crisis in the eurozone.
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Back to today and, my word, yesterday was quite the day for markets.
Bond yields plumbed new depths. Gold soared. Equities swung about a bit before managing to close higher, because equity investors generally like to view the glass as half full, right up to the point at which it gets smashed over their heads.
What's going on?
Bond yields are sinking to new lows
In summer 2016, in the wake of Britain's vote to leave the European Union, bond yields around the world hit their lowest levels on record.
That is, until now.
The vast majority of developed world government bonds have now dropped below their 2016 nadirs (including the UK ten-year gilt).
The US is an exception, though only so far. Below, we see the yield on the ten-year US Treasury from mid-2015 until yesterday. As you can see, it's not far off its 2016 low.
I'll freely admit (as I already have) that I thought 2016 would be the low for yields (and therefore the peak for bond prices). I thought wrong.
So what on earth is going on?
There are murmurings of a "new normal". I notice that Joachim Fels of Pimco has put out a note arguing that negative bond yields (whereby lenders pay money to be allowed to park their money with a given borrower) are being driven by long-term factors. He's warning that US bond yields could eventually turn negative if the Federal Reserve, America's central bank, is forced to restart quantitative easing.
Fels is a smart man and I'd like to take a closer look at the case for negative bond yields in a future Money Morning once I've had time to digest the idea.
However, it is clear that there is at least an element of momentum trading to this move. In other words, it's not all about the fundamentals. Take the 100-year Austrian government bond. By no stretch of the imagination is this a safe haven asset. But it has been an absolutely fantastic performer.
Why? Because the longer the maturity date on the bond, the more sensitive it is to interest rate movements. And as rates have been going down, the Austrian bond has soared. (The opposite would happen if rates go up).
As John Authers points out in his Bloomberg column, Mexican century bonds have also done very well. This again doesn't make that much sense given that "few countries are more exposed to shifts in the global trade cycle".
So I'm not quite ready to throw in the towel on the "bonds look bubbly" argument just yet. While some of the demand for negative-yielding government bonds might be down to a rush for safety based on a negative view of the fundamentals, the surge in the prices of the edgier stuff just smacks of trend-chasing.
Fear of deflation may be driven by fear for the eurozone economy
I do wonder what has spooked the market, though. And casting back to the last full-on deflationary scare in 2016, I'm wondering if they have more in common than perhaps I first thought.
I've viewed the fact that bond yields hit a major low following the Brexit vote as being little more than coincidence. I'm starting to think that's wrong.
The focus in the last week or so has been on the US and the Federal Reserve and China and trade wars. But maybe what's really spooked the markets is Europe.
Germany has released a string of woeful economic data in recent months. Yesterday, we learned that industrial production slid hard in June. It's now looking quite likely that the economy will have shrunk during the second quarter. If Germany goes into recession, that's got to be ugly for Europe.
Meanwhile, of course, Britain looks increasingly likely to end up leaving on a "no-deal" basis. Regardless of how bad you think this will actually be (I tend towards the less melodramatic side), it's not a prospect that's going to make any investor outside of the UK and the eurozone feel comfortable.
In terms of events that could unleash another deflationary collapse on the world, then another proper crisis in the eurozone is perhaps the top candidate. The banking system is still ropey, and not being helped at all by negative interest rates.
Mario Draghi at the European Central Bank (ECB) has done a good job of holding the monetary system together with elastoplasts, but the political side of things is still not a lot further forward than where it was at the end of the last crisis.
Financial analyst and historian Russell Napier has argued that the collapse of the euro would be exactly the sort of unprecedented event that could be being signalled by today's unprecedentedly low interest rates (you can see Russell in person at the MoneyWeek Wealth Summit on 22 November get your ticket here now).
Now, to be very clear, I'm not arguing that we're looking at an imminent collapse in the eurozone, because my gut feeling (for now) remains that when push comes to shove, the political appetite to maintain the whole thing is still too strong.
But a fresh crisis triggered by an economic slowdown and the ECB's limited ability to boost actual growth, rather than prop up asset prices? That could certainly happen, and it could well be a scary moment for markets.
Equally, it might be fended off maybe with another big "bazooka" from the ECB and investors might decide that they over-reacted, and bond yields could edge higher again, just as they did after they hit rock bottom in 2016.
I hate to say it, but we just can't predict the future. The key, as I've said a few times this week, is not to panic. Stick to your plan, and if you don't have a plan, then focus on making one, and don't touch your investments until you've done so.