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ALLOCATION PERSPECTIVE : Interpreting the economy: which market is wrong ?

24.06.2014

Market analysis by Franck Nicolas, Head of Investment and clients solutions.

"US equity and bond markets have performed in-line over the past few weeks. As a result, the correlation between 10-year rates and the S&P 500, which had turned positive since the announcement of Fed tapering (steepening rates and stronger equity markets), is now weakening once again.

At this level of long-term rates, circumstances have become abnormal, signifying that one of the two markets is undoubtedly misinterpreting the situation.


Either equity markets are correctly indicating that US growth is probably soundly on track and certainly likely to accelerate. In this case, however, the output gap will soon narrow and forthcoming inflationary tension will oblige the Fed to tighten monetary policy, involving a hike in long-term rates.


Or alternatively, bond markets are providing a correct reading of the situation by indicating that growth is bound to level off, with the Fed adopting a wait-and-see attitude. In this case, US equities are clearly overpriced and a correction is highly likely in this market."

Read further in Allocation Perspective