Markets mixed, high yield bond market flashes warning

Markets were mixed on Wednesday.

The S&P 500 fell less than 0.1 percent and the Nikkei 225 fell 0.8 percent but the STOXX Europe 600 rose 0.4 percent.

News late Tuesday of the resignation of top White House economic adviser Gary Cohn renewed concerns of a trade war.

Brad McMillan, chief investment officer for Commonwealth Financial Network, wrote in a note that Cohn's resignation “introduces more uncertainty into economic policy and raises the chance of policy actions such as tariffs”.

BlackRock Investment Institute's multi-asset investment strategist Terry Simpson said that tariffs would be a “game changer”. Speaking on CNBC, he said: “Let's make no mistake about it, tariffs are bad economic policy.”

However, Matt Maley, equity strategist at Miller Tabak, thinks that the game may already have changed.

In an article for CNBC, Maley noted that the high-yield corporate bond exchange-traded fund, the HYG, peaked five to six months before the stock market topped out in January, and since then, “the high-yield market has not behaved well at all”.

“This is quite reminiscent of what took place in 2015, when the high-yield market topped out and began rolling over five months before the stock market began its 14 percent decline into early 2016,” he wrote.

Maley concluded that if the HYG breaks beneath its February lows and puts in yet another “lower low”, it would be a “big negative for this asset class” and for the stock market.