On the defensive

The four-month winning streak came to an abrupt end in May. Markets were increasingly concerned about the outlook for global economic growth. President Trump’s increasingly belligerent rhetoric was the main factor. Optimism that trade talks with China would come to a speedy and successful conclusion were dashed. President Trump slapped further tariffs on Chinese goods, but instead of rolling over China retaliated with tariffs of its own. The fall in confidence is no better illustrated than by the dramatic collapse in US Treasury yields. The 10-year Treasury yield dropped from 2.5 per cent to 2.15 per cent during the month. Only last November the yield was 3.3 per cent. There has been a shift in market expectations, with an 81 per cent probability of two cuts or more now being priced in. Europe has not escaped, with German 10-year yields at -0.21 per cent; in Greece the yield has moved from a record high of 42 per cent in 2012 to an all-time low of 2.9 per cent.

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