U.S. 10-year yield, USD/JPY likely to fall should sell-off in US stock markets take place as earnings season looms: Scotiabank

The United States 10-year yield and the USD/JPY currency pair is expected to fall should a selloff in US stock markets take place late this week or early next week as US earnings season looms, according to the latest research report from Scotiabank.

Major US banks will post results on Friday to kick off the earnings season, while the market is predicting the first quarterly earnings contraction in nearly three years. US stocks have been rallying and are approaching previous highs, largely due to lower risk-free interest rates and risk premium rather than bright growth outlook.

The Fed is expected to stay accommodative in order to avert a pullback in US stocks and the UST yield curve inversion, the report added. The IMF said on Tuesday that the global economy is slowing more than expected and that a sharp downturn could require the world to coordinate stimulus measures.

In its latest World Economic Outlook released Tuesday, the fund said the world economy will grow 3.3 percent this year compared to the January prediction of a 3.5 percent expansion. It’s the third time the IMF has downgraded its outlook in six months, with a warning of high chances of further cuts to the outlook, the report added.

In addition, US President Donald Trump tweeted Tuesday that the US would impose tariffs on USD11 billion of products from the European Union, raising concerns over escalating US-EU trade dispute.

Meanwhile, foreign investors are expected to continue pouring funds into the region to chase higher yields amid the Fed’s dovish tone, propping up EM Asian currencies in general.

"We note the total sum of negative-yielding debt represented in the Bloomberg Barclays Global Aggregate Bond Index has surged to around USD9.8 trillion. Risk appetite in China is expected to continue," Scotiabank further commented in the report.