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    World's most important chart faces one mighty risk, warns Chris Wood

    Synopsis

    Describing the monthly chart of US bond yield as “the most important chart in the world”, a break of the trend would amount to confirmation of the end of the disinflationary era of the past 40 years.

    Chris WoodETMarkets.com
    Christopher Wood, Global Head of Equities, at Jefferies
    NEW DELHI: A trend that has been going on for 40 years may be disrupted, warned Christopher Wood, Global Head of Equities at Jefferies, in his weekly newsletter Greed & Fear.

    Describing the monthly chart of US bond yield as “the most important chart in the world”, a break of the trend would amount to confirmation of the end of the disinflationary era of the past 40 years.

    “It is also worth noting that the 10-year (US) treasury bond yield is not so far off testing the long-term trend line in place since the bull market in Treasury bonds began in 1981, which is currently at around 2.8 per cent,” said Wood.

    The announcement of monetary tightening has led to a further sell-off in the treasury bond market in the US, and elsewhere. The 10-year treasury bond yield rose from 2.55 per cent on Tuesday to an intraday high of 2.69 per cent on Friday.

    importantETMarkets.com


    The celebrated money manager said the biggest risk to the trend is significant surge in the oil price, say to the $150 per barrel level. The crude oil prices had rallied recently to well over $120 per barrel, though it has come down now to around $100 per barrel.

    “If the traditional correlation between the oil price and inflation expectations remains intact, this would cause the five-year five-year forward inflation expectation rate to surge well beyond the 2.5 per cent level, which is a sign that long-term inflation expectations are becoming destabilised or ‘unanchored’ to use central bank jargon,” said Wood in his letter.

    “If this indeed proves to be the case then the new hawkish Fed should respond to such a signal by more tightening, whereas for most of the past 40 years oil price spikes were seen as deflationary because they reduced disposable income.”

    It is this change in expected response that may result in breaking of the trendline.

    China facing double whammy

    China has shut down some of its top cities asking residents to stay indoors as a wave of the pandemic has gone uncontrolled. The daily new Covid cases in China, including confirmed cases and asymptomatic cases, rose to a record level of 26,000 this week.

    “The above raises the risk that China, with a growing number of localised lockdowns, suffers a ‘double whammy’ in terms of the negative impact on growth of the lockdowns while at the same time failing to keep the pandemic under control,” said Wood.

    The impact on growth from the localised lockdowns is clear from the latest PMI and property sales data. The official manufacturing PMI declined from 50.2 in February to 49.5 in March, the lowest level since October, while the non-manufacturing PMI fell from 51.6 to 48.4, the lowest level since last August, he noted.



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    (What's moving Sensex and Nifty Track latest market news, stock tips, Budget 2024 and expert advice, on ETMarkets. Also, ETMarkets.com is now on Telegram. For fastest news alerts on financial markets, investment strategies and stocks alerts, subscribe to our Telegram feeds .)

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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