Global Markets: Stocks Over Bonds

No matter what short-term respite is on the cards for global fixed income (the JPMorgan EMBI Plus spread has already eased back to 305 basis points (bps) from a high of 390bps in June), we continue to believe that fixed income offers little value compared with equities over the medium term. The MSCI All-Country World equity index, which includes the major developed and emerging market stock markets, looks strong – but strip out the US, and the index looks as though it will continue to move sideways at best. The S&P 500 closed on July 18 at an all-time high of 1,693, and while it weakened after the close, on the long-term charts it continues to look good. Interestingly, this run-up has happened alongside a sustained rise in US Treasury yields, with the 10-year instrument at 2.53%, up by more than a percentage point from the low. For most of the 2011-13 period, stocks rose as yields fell – an unusual disconnect compared with much of history – but now, the relationship between higher stocks and higher yields appears to have returned. In other words, there is an increasing acceptance that tightening monetary policy could be a good thing, insofar as it signals a sustained recovery in economic activity in the US.

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This Week’s Trivia Question

Last week’s question was as follows: Which Latin American country had a currency in the 1980s that almost entirely shared the name of a country many thousands of miles away, and still has an airline with the same name as that former currency? The answer is Argentina, whose currency was called the austral from 1985 to 1991. The airline of the same name still exists.

This week’s trivia question is inspired by Detroit’s decision to file for chapter 9 bankruptcy. Which late 1980s US science fiction blockbuster is set in a crime-ridden, decaying Detroit, parts of which are planned to be razed to make way for a new city in the film? And separately, in view of Japan’s Upper House elections this weekend, which South American individual made an unsuccessful bid for a seat in the Japanese Upper House in 2007?