The nuclear cloud hanging over Japan lifted on Friday. Japan can get back to work and begin the rebuilding of its economy sooner rather than later. Relief that the radiation damage to Japan would be limited improved the outlook for the global economy to which equity markets responded very positively over the past two trading days. Equity markets are now back to the levels of 10 March, the day before the Tsunami struck.
US Treasury Bonds, and especially their inflation protected variety (TIPS), benefitted from their safe have status. This left compensation for bond holders bearing inflation risk largely unchanged. This compensation (or what may be regarded as inflation expectations) is shown in the difference between vanilla bond yields and their inflation protected equivalents.
While US Treasuries predictably acted as safe havens, so somewhat surprisingly, did US corporate bonds. The high yield, so called Junk Bonds have held up particularly well through the recent turbulence.
The strength of the US corporate bond market reflects well of the balance sheets of the average US non-financial corporation. It also speaks well of the recovery prospects of the US economy. The case for equities, especially those well exposed to the global economy, remains a strong one, given what we have argued are undemanding valuations. And given the dramatic events of the past few weeks the markets are back to where they were and therefore continue to offer value in our judgment. That the markets could absorb all that nature and engineering fallibilities threw at them, might indicate less rather than more risk to the economic and earnings outlook.
To view the graphs and tables referred to in the article, see Daily Ideas in todays Daily View: Equity markets: Back to square one