A Paradigm Shift in Markets? Probably Not

Over the long term, markets are generally rational and efficient entities. On a day-to-day basis? Not so much. That was proven on Thursday as global equities surged to cap their biggest two-day gain since January and government debt securities tumbled. The popular iShares 20+ Year Treasury Bond exchange-traded fund plunged 1.81% in its biggest drop since March 2017.

The outsized moves were primarily sparked by two developments. First, Chinese officials agreed to visit Washington in “early October” for face-to-face trade talks with U.S. trade representatives. While that’s encouraging, almost nobody in markets expects an agreement anytime soon, given that the two sides are so far apart on key issues. Second, the Institute for Supply Management said its non-manufacturing – aka, services – index for August rose to a three-month high, exceeding the most optimistic forecast in a Bloomberg survey of economists. Again, that’s encouraging, but it’s no surprise that this part of the economy has been holding up, thanks to the consumer. That leaves the more plausible, albeit less exciting, explanation for the moves, which is that investors took the China and ISM developments as an opportunity to rebalance what had become extreme positioning. Bank of America’s latest monthly survey of global institutional investors revealed that they were the most bullish on bonds since November 2008 – a month when many thought the worldwide financial system was collapsing. Similarly, the State Street Global Markets monthly index shows investors are less confident in the outlook for equities than during the financial crisis.