Markets Sense the Narrative May Be Changing

The story of global markets this year has been driven by two key themes: the Federal Reserve’s dovish pivot and purported progress in U.S.-China trade talks. In a matter of just 24 hours, however, both are at risk of going from a net positive to a net negative.

The Fed’s decision in January to suggest that it may not need to raise interest rates in 2019 has fueled this year’s gains in equities and sparked a rally in fixed-income assets, lowering yields and further loosening financial conditions. On the trade front, frequent pronouncements from the Trump administration that talks with China were, as economic adviser Larry Kudlow said Monday, making “very good progress” only bolstered investor sentiment. But now, it looks like investors can no longer count on either of things to underpin markets. On Wednesday, both stocks and short-term U.S. Treasuries fell after Fed Chair Jerome Powell seemed to doubt that the recent slowdown in inflation would last, saying the central bank didn’t see a strong case for moving rates down or up. That blindsided traders, many of whom had priced in a rate cut this year. Stocks extended their declines Thursday, with the MSCI USA Index falling as much as 0.81 percent and MSCI’s global index dropping 0.11 percent as China’s Global Times reported that trade watchers are wondering if China-U.S. talks have hit an impasse, as there were few details revealed after the latest meetings on Wednesday. Meanwhile, bonds declined across all maturities.