The record high stock market may be signaling it's the best of times. But the bond market looks to be saying just the opposite: If it's not the worst of times, it soon could be.
Traders have been debating which one is right — the stock market grinding to new highs, or bonds, with yields at post-Election Day lows.
Stocks have been guided by solid earnings and still some hope that there could be stimulus coming from Washington, but Treasury yields, which move opposite price, are trading lower amid concerns the lack of inflation and sluggish economy could be a problem if the Federal Reserve raises interest rates too much.
The great divide between markets should remain a theme in the coming week, but there are several events that create the opportunity for volatility across financial markets — and all of them occur on Thursday.
Then there's the European Central Bank meeting, which has been surrounded by a swirl of speculation that the central bank could signal a pending end to some of its easy policy. That could move the euro, bond yields and stocks if the ECB signals it is getting set to pull back, though analysts do not expect anything abrupt.
There's also the U.K. election, called by Prime Minister Theresa May in the hopes it would show a mandate for Brexit.
"Fear of a European
The U.K. election was expected to go smoothly, but the Labour Party has been making gains in the polls. It's not clear May will get the majority she expected, casting doubt on how smoothly the U.K.'s negotiations to unwind from the European Union will go.
"I think this is just one episode in the drama between the euro zone and the U.K. that's going to be playing out and markets have to focus on the longer term. Who has the stronger hand and who gets what?" said Steven Wieting, Citi Private Bank chief global strategist.
Stocks ended the week with the Dow, Nasdaq and S&P 500 all at record highs. Technicians are looking to see if the Russell 2000 confirms the trend. It was up 1.7 percent for the week.
The S&P 500 closed at 2,439, up 0.4 percent. Meanwhile, bond yields fell, and the 10-year was at a low of 2.15 Friday.
Analysts said the low yields in the bond market were also serving as a catalyst for stocks.
"It's earnings and the constant rotation. The yield on the 10-year is so low, the dividend darlings are back in vogue. It's consumer staples. It's REITs. It's utilities, and it's telcos," said Hogan.
The S&P utility sector rose 1.7 percent for the week, to an all-time high. The health-care sector rose 2 percent for the week, and telecommunications stocks were up 2.3 percent.
"I just don't think we can use the yield of the 10-year as a barometer for the economy," said Hogan. He said it is a safety play, but it also points to the lack of inflation. "We have reason to think we need harbors of safety right now."
With bond yields plumbing new lows, the trade in the coming week could focus on technicals and big round numbers.
"I think it's going to be largely a technical trade," said Ian Lyngen, Treasury strategist at BMO. "I think we come in Monday morning and the market tries to re-trade the jobs data ... what the data means and what it implies for monetary policy. I think there will be an opportunity for more volatility early in the week, and then we'll be back to more of the same ... a holding pattern, limited new information and watching the corporate deal flow."
The testimony of James Comey has been a much-anticipated event, and the very idea that Trump could be ensnared in some obstruction of the investigation rattled markets when news reports said Comey had said Trump interfered.
"If it looks like he wasn't involved, the market's fine, and we move on, but if it clearly feels it's a crossed line and could make a significant case and we are talking about obstruction of justice again, that's certainly going to give the market problems," said Hogan.
Jim Caron, Morgan Stanley Investment Management fixed income portfolio manager, does not expect to see anything material come of the testimony.
"I personally don't think anything comes out of it. I think it becomes a partisan debate, but the market needs to see a resolution of that," Caron said. "This is an event we're all going to be watching. It's certainly going to take a lot of attention. The good news is once it's over, it's over."
The ECB is at most expected to make minor tweaks to the language in its post-meeting statement Thursday, but markets are on high alert because of the recent runup in the euro, up 0.9 percent in the past week, a seven-month high.
"Everybody I talk to expects there will be some tweaking of the forward guidance, which has two components," said Marc Chandler, head of foreign exchange strategy at Brown Brothers Harriman. "One component of the forward guidance talks about how interest rates will remain at this level or lower. They could drop that 'or lower.'
"But the markets already know that European rates have bottomed. This is going to confirm what the market already knows," said Chandler. He said the ECB could also change a comment about risks and say they are balanced.
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