Change of Perception

Remembering not too long ago, the financial market was pricing in a possible "rate cut" by the U.S. Fed. Well, growth seems to be slowing down, inflation remain benign, housing sector woes were developing into a 'crisis' etc etc. Thus, equity and bond markets were both rallying and guess alot people out there have made some handsome profits for the last few months.

But is growth really slowing down? i am not too sure, neither does the global investing community, mainly because the "confirming numbers" are not out yet.

Nonetheless, the markets were "moving ahead of themselves" where we see huge foreign inflows flooding Asian markets, pricing in a rate cut anytime soon by the Fed. As a result, KLCI went up 23% year-to-date, while Malaysia's bond yields have dipped below its overnight rate. Crazy indeed.

The market trades on expectation. So the market priced in (i.e. BET) that the US growth was going to slow down, inflation will be kept low, housing market will go bust etc etc... However, after few months and nothing has materialised yet!

and out of a sudden, (not really that dramatic, but what da heck) US growth number published was rather resilient and employment data was still ok. Analysts out there were shouting for a possible spike up in the inflation numbers, and in turn, both market went into a technical correction last week. It is a "technical correction" because the markets were just correcting to the level that goes in line with the "revised expectation". A change of perception.

Due to the flushed liquidity in the system, coupled with the positive few good factors on global front, both bond and equity markets were positively correlated for the last few months. Both move up and down together, which is not what the financial text book has taught us.

The inversion of US yield curve (usually signify a recession) few months ago was deemed as "not telling the true story" as the "conundrum story" of excess global savings is the main culprit causing the inversion, but not the slowing economy.

Yet, at our own backyard, Malaysia's bond yield curve has been inverted for quite some time, and i believe that this time around, it is trying to tell us something...