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SNB move will accentuate bond-equity divergence

Monday, January 19, 2015

Significance

The move mainly aims to pre-empt the widely anticipated launch of a sovereign quantitative easing (QE) programme by the ECB on January 22. However, it will accentuate divergences between bond and equity markets. Sovereign bond yields for most advanced economies are falling to new lows and are increasingly negative at the shorter end of the yield curve, because of deflation fears and lacklustre growth outlooks. Yet equity markets are hovering near record highs, buoyed by the US recovery and expectations of further monetary stimulus in the euro-area.

Impacts

  • Bond markets will be driven by deflation fears, while equity markets, especially US stocks, will be buoyed by Goldilocks-type conditions.
  • Market expectations that the ECB will launch a sovereign QE programme will make bond yields fall further.
  • Bond yields will be suppressed by investor scepticism about the ECB's ability to reflate the euro-area economy.
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