It all seemed so easy, but then along came Italy and Cyprus

Bond yields: watch out for the great rotation.

Watch out for the great rotation was the ubiquitous catch phrase as we entered 2013. Bond yields had become absurdly low, in many cases negative, in real terms. Equities were fairly valued and, with the major central banks of the world printing money like "no tomorrow", inflation would soon take off, reducing bond markets to rubble, whereas stocks would offer good inflation protection. What could go wrong-buy equities and sell bonds?

It all seemed so easy, and by the end of January it all looked fine and dandy-equities were duly perky, and ten-year US Treasury yields had climbed over 2 per cent, from around 1.75 per cent at the end of 2012. Then, in February and March, along came Italy and Cyprus.

Italian elections lead to complete impass and raised the possibility that back-tracking on fiscal reform would rear its forbidden head, and worse, it seemed likely that Eurozone policymakers were about to fire both barrels at their own feet, to paraphrase Dutch Finance Minister Dijsselbloem, using the Cyriot confiscation of bank depositors’ money as a ‘template’ to dress the balance sheets of Europe’s weaker banks. This all lead to a flight to safety in US Treasuries, so yields fell back again, their descent hastened by weak US employment figures.

But now the landscape has changed again with the Bank of Japan’s, (BOJ), incredibly aggressive new quantitative easing policy-much bigger as a percentage of GDP than the US Federal Reserve’s programme. There is finally a chance that the Japanese economy will rise from 20 years of slumber, but there is also a great risk that other major central banks be unable to resist the peer group pressure to emulate the BOJ, by ramping up the scale of their own money printing. Hardly a world conducive to lower bond yields, maybe not even in Japan if the government and BOJ are successful and reach their 2 per cent inflation target.

The US economy is already on a relatively robust recovery path, with an enormous corporate cash mountain about to be put to work in investment, now that the imagined dangers of fiscal cliff, debt ceiling and sequestration are receding, and the Eurozone political masters patently just as fanatically committed as ever to ensure the Euro’s survival. US animal spirits will make this soft patch very short and soon the down-leg for the bond market will resume in earnest.

Photograph: Getty Images

Chairman of  Saxo Capital Markets Board

An Honours Graduate from Oxford University, Nick Beecroft has over 30 years of international trading experience within the financial industry, including senior Global Markets roles at Standard Chartered Bank, Deutsche Bank and Citibank. Nick was a member of the Bank of England's Foreign Exchange Joint Standing Committee.

More of his work can be found here.

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Leader: Trump and an age of disorder

Mr Trump’s disregard for domestic and international norms represents an unprecedented challenge to established institutions.

The US presidency has not always been held by men of distinction and honour, but Donald Trump is by some distance its least qualified occupant. The leader of the world’s sole superpower has no record of political or military service and is ignorant of foreign affairs. Throughout his campaign, he repeatedly showed himself to be a racist, a misogynist, a braggart and a narcissist.

The naive hope that Mr Trump’s victory would herald a great moderation was dispelled by his conduct during the transition. He compared his country’s intelligence services to those of Nazi Germany and repeatedly denied Russian interference in the election. He derided Nato as “obsolete” and predicted the demise of the European Union. He reaffirmed his commitment to dismantling Obamacare and to overturning Roe v Wade. He doled out jobs to white nationalists, protectionists and family members. He denounced US citizens for demonstrating against him. Asked whether he regretted any part of his vulgar campaign, he replied: “No, I won.”

Of all his predilections, Mr Trump’s affection for Vladimir Putin is perhaps the most troubling. When the 2012 Republican presidential nominee, Mitt Romney, warned that Russia was the “number one geopolitical foe” of the US, he was mocked by Barack Obama. Yet his remark proved prescient. Rather than regarding Mr Putin as a foe, however, Mr Trump fetes him as a friend. The Russian president aims to use the US president’s goodwill to secure the removal of American sanctions, recognition of Russia’s annexation of Crimea and respect for the murderous reign of the Syrian president, Bashar al-Assad. He has a worryingly high chance of success.

Whether or not Mr Trump has personal motives for his fealty (as a lurid security dossier alleges), he and Mr Putin share a political outlook. Both men desire a world in which “strongmen” are free to abuse their citizens’ human rights without fear of external rebuke. Mr Trump’s refusal to commit to Nato’s principle of collective defence provides Mr Putin with every incentive to pursue his expansionist desires. The historic achievement of peace and stability in eastern Europe is in danger.

As he seeks reconciliation with Russia, Mr Trump is simultaneously pursuing conflict with China. He broke with precedent by speaking on the telephone with the Taiwanese president, Tsai Ing-wen, and used Twitter to berate the Chinese government. Rex Tillerson, Mr Trump’s secretary of state nominee, has threatened an American blockade of the South China Sea islands.

Mr Trump’s disregard for domestic and international norms represents an unprecedented challenge to established institutions. The US constitution, with its separation of powers, was designed to restrain autocrats such as the new president. Yet, in addition to the White House, the Republicans also control Congress and two-thirds of governorships and state houses. Mr Trump’s first Supreme Court appointment will ensure a conservative judicial majority. The decline of established print titles and the growth of “fake news” weaken another source of accountability.

In these circumstances, there is a heightened responsibility on the US’s allies to challenge, rather than to indulge, Mr Trump. Angela Merkel’s warning that co-operation was conditional on his respect for liberal and democratic values was a model of the former. Michael Gove’s obsequious interview with Mr Trump was a dismal example of the latter.

Theresa May has rightly rebuked the president for his treatment of women and has toughened Britain’s stance against Russian revanchism. Yet, although the UK must maintain working relations with the US, she should not allow the prospect of a future trade deal to skew her attitude towards Mr Trump. Any agreement is years away and the president’s protectionist proclivities could yet thwart British hopes of a beneficial outcome.

The diplomatic and political conventions embodied by the “special relationship” have endured for more than seven decades. However, Mr Trump’s election may necessitate their demise. It was the belief that the UK must stand “shoulder to shoulder” with the US that led Tony Blair into the ruinous Iraq War. In this new age of disorder, Western leaders must avoid being willing accomplices to Mr Trump’s agenda. Intense scepticism, rather than sycophancy, should define their response.

This article first appeared in the 19 January 2016 issue of the New Statesman, The Trump era