“We see a U.S. recession as increasingly likely in 2021,” said Colin Moore, global chief investment officer at Columbia, which has about $500 billion in assets under management. “We expect it to be a fairly shallow recession. In this environment, long-term Treasury yields could fall to new lows.”
Nonetheless, over the past few weeks, risky assets have been hell-bent on trading on hope, with shares rising when Trump or his team drop any crumbs through tweets and otherwise that the rift with China is near ending. That’s how John Briggs and his colleagues at NatWest sum it up. What follows, he says, is failure of the trends to hold as facts prove ultimately to be “in the wrong direction.”
The S&P 500 has tumbled since late July, but only sunk to levels seen in early June. Futures on the index turned higher during the European morning Monday after Trump said China was willing to resume trade talks.
Treasuries aren’t so sanguine. With the trade outlook dimming, yields plunged Friday as traders lifted the degree of Federal Reserve easing they were pricing in. And that trend continued Monday, with the 10-year falling to 1.44%, close to the all-time low of 1.318% reached in 2016, though yields have rebounded to 1.53%.
Big swings have become the norm across equity markets. The S&P 500 has closed above or below the 1% threshold nine times in August, a rate not seen since December.
“Tariffs in general, you can see that’s an overhang on this market and a key driver right now,” said Keith Lerner, chief market strategist at SunTrust Private Wealth Management. “Every time those headlines are suggesting things are getting better, people jump on to those. And when there’s headlines suggesting things are deteriorating, people jump on those. I don’t see how you have an edge on trading this right now.”
Treasuries investors could seek advice from their seasoned emerging-market colleagues, long accustomed to erratic communication from government officials. Traders dealing with riskier developing-nation assets have faced a rich legacy of politicians mentioning default or championing the populist rhetoric that defies market rationale.
The illiquid nature of these emerging markets and reliance on informal lines of communication with investors make traders think twice before immediately acting on unexpected news.
“Irrespective of Trump tweets, the trade conflict is getting worse,” said Peter Schottmueller, who helps manage about $330 billion as the head of multi-asset allocation at Deka Investment GmbH in Frankfurt. “Developed-market investors are not used to handling political shocks and erratic government policy.”
The impact of Trump’s trade tweets isn’t dissimilar from the deluge of Brexit headlines that have taken the pound’s volatility to emerging-market levels.