Markets are readying themselves for US-China decoupling by sharply reducing exposure to Chinese stocks. Some Japanese companies have started exploring ways to go ‘zero-China’, with Honda Motor exploring a project that would source as few China-made parts as possible.
Relative to US Treasuries, US stocks still look expensive. For 10-year US Treasuries for example, the yield gap with the Shiller CAPE suggests the stock market is the most overpriced in 15 years. The 10-year Treasury yield remains above 4% and may not fall far below this level for the whole of 2023. As such, the stock market remains highly vulnerable to downside earnings surprises.
As noted in yesterday’s commentary, the rise in the 30-year US Treasury yield to new highs is also indicating that an early pivot for the Fed will backfire.
In a world of QT, the old playbook for equity investors, relying on a secular bull market in bonds, has run its course.
Gilt yields have at least returned to levels last seen pre-mini budget, with the 30-year Gilt yield falling to 3.65% at one point this morning. The 25-year index-linked gilt is up 50% over the past two weeks reflecting confidence in a tighter fiscal policy.
But globally, fiscal policy may still be too loose. Japan is considering a new fiscal support package of ¥20 trillion ($133 billion), to support households with inflation and to rejuvenate the tourism sector. Indeed, 20-, 30- and 40-year JGB yields have jumped again to new highs: Japan remains a big risk for bonds globally.
