By guest contributor Simon Fasdal from Saxo Bank
There are undoubtedly positive signals when looking at the global economy here on the verge of 2017. We ended the year on higher highs in equity markets with some regions starting to surprise on global growth.
On a global scale, as well, inflation is beginning to move – both on surprise indices and in inflation figures.
All of this is good news for the world economy, as removing the deflation ghost once and for all has been a key strategy for central banks for a long time. But it’s not all “happy days”…
We have also witnessed a very rapid move in 10-year US Treasury yields, similar to the situation after former Federal Reserve chair Ben Bernanke’s famous “tapering” comment in May 2013 – this time surging more than 1% from the summer low around the 1.50% area.
Last time, with help from Bernanke, the spike in US yields sparked a global selloff in bond markets, sending corporate bonds and emerging markets into meltdown mode as US 10-years hit 3%. Will it be different this time around?
Well, if we see more proof for global growth and inflation, global core yields could go higher, but there are factors that indicate we might not see a global selloff in other bond markets this time around:
The global economy is improving
An improving global economy is not only helpful for Europe and US – all countries should benefit, including emerging markets. “Old” BRIC countries like Brazil and Russia have been struggling with low and even negative growth due to very low commodity prices and an overall standstill in the global economy.
They among others will benefit from foreign demand, for example for iron ore, as well as a higher oil price.
The stronger dollar
The recent strengthening in the dollar is extremely helpful for exports to US markets, something that on a broad basis brings activity back to both Europe and emerging markets. As long as EM currencies are not “falling out of the bed”, then the stronger dollar helps to support local financial markets.