Talking to ET Now, Peter Cardillo, Spartan Capital, says it is going to be a bumpy ride both in terms of economic activity and for equities around the globe. That does not mean that we are headed for any major correction now.
The bond yields in the US have crossed the psychological 3% mark. It has left its imprint even on the global equity markets. We have seen carnage over there. Do you believe that the bond yields are set to be firmly above the 3% mark for a longer duration?
I think so. Basically, what we saw here over the past week or so was that the 10-year note was continuing to attempt to pierce that 3% level. Yesterday we did trade as high as 3% and now we are just a bit over that. So, I suspect we are going to see a new higher trading range and that means that we are probably going to sell somewhere between 3% and possibly 3.10% and of course I think that will continue to put market under pressure.
The stock market certainly is going to remain sensitive to climbing yields and the yield curve is beginning to inverse somewhat. Then it just means that good news for equities probably will be interpreted as bad news and bad news will be even more of a problem for the equity markets.
Is this something that may have come a little too soon because we had just started seeing corporate earnings recover in the last couple of quarters in the United States. Could the higher range of bond yields slam the breaks or perhaps even moderate the pace of growth in corporate earnings but in the US economic growth in general?
No, I do not think so. I mean, if we got to 3.5 or 4%, the answer would be yes, but I do not think we are headed for those levels just yet unless we get a sudden burst of inflation. I do not think that that is in the cards just yet. We might see a bit of a slowdown in consumer spending and that is because the cost of money is going to go up which in turn means our interest rates will go up. The people are heavily indebted and will have to be paying more and so disposable income might fall a bit. But again, I do not think we will get to levels any time soon that would cause a real problem in terms of consumer spending or consumer confidence.
Consumer confidence is actually up again. The consumer is still pretty much upbeat about the economic outlook and I suspect unless the cost of money gets too expensive, too quickly, then the spending should remain at respectable levels.
Up until now, we had great flows coming in from FIIs in Emerging Markets on account of this low interest regime. How would you position yourself now in assets in emerging markets?
Will emerging markets catch a cold from this? Probably. Are they going to get pneumonia? No, but certainly it is going to cause a little bit of negativity among the emerging economies. But again, not to the point where we can reverse and perhaps wind up in negative growth. Basically, it is going to be a bumpy ride both in terms of economic activity and of course for equities around the globe. That does not mean that we are headed for, at least not for now anyway, for any major correction.
Rising yields are going to cap perhaps any further gains and we could see the markets turn quite volatile but staying within a downward trading range as opposed to any serious correction.