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The markets' trouble with the 1%

Michael Santoli
Michael Santoli

Once again, outrage is spreading over the unpopular moves of the 1%.

Hedge fund billionaire John Paulson is perhaps surprised today at the anger directed at his decision to give $400 million to Harvard’s engineering school. He’s effectively redeploying his winnings from shorting the US housing market several years ago to a university that hardly needs the money. Tax free.

More relevant to markets and less debatable is the other 1% tantrum stoking emotions: The German 10-year government bond yield is rushing upward toward 1%, in a move that’s too fast and disorderly for currency and stock markets to handle well. The German benchmark yield was barely above zero less than two months ago, sitting at 0.08% as the world bet on a risk of European deflation and the central bank there prepared to buy up lots of safe debt to counter that risk. Overnight, this yield shot above 0.9, and briefly touched 1%.

Why do world stock markets care if the government bond yields of a very safe country rise toward the still-low threshold of 1%? Especially when the move is happening in part for welcome reasons – an uptick in European growth and inflation, and the prospect of an acceptable extension of the Greek bailout program?
Mostly because of the speed of the move and the way it has upended crowded trades in related markets.

On Wednesday, European Central Bank President Mario Draghi essentially told investors that some level of bond-market volatility is to be expected and is tolerable given ultra-low rates and rich asset prices. In other words, deal with it – even if, as many now complain, bond markets are illiquid and treacherous.

The market machinations are driving up the euro against other currencies and knocked European stock markets back about 1.5%. The US 10-year Treasury yield (^TNX) is challenging seven-month highs, too, surpassing 2.35%, as a potentially crucial monthly jobs report awaits Friday.

Yesterday here we discussed the unusual ability of stock markets so far this year to withstand lots of volatility in bonds and currencies without growing too excitable. Stocks here, too, have shown a tendency to grind higher later in the trading day after starting with losses. With stock futures dipping red on the overseas action, today could prove a decent test of equities' recent show of resilience.

Media merger melee

What is that rectangular device in your pocket – the one you look at dozens of times a day and need to keep charged? Is it a phone? An Internet appliance? A TV?

Exactly. It’s all of those and more. Media and communications right now are all about signals and screens, and it doesn’t matter what sort of signal or what size screen. So now the companies on the back end, the ones sending various kinds of signals, are joining together to be able to deliver a fuller range of the content and services we insist on pulling into our pockets.

That’s the story of the reported advanced merger talks between satellite TV provider Dish Network Corp. (DISH) and wireless-service maverick T-Mobile US Inc. (TMUS). It would unite two visionary CEOs in DISH's Charlie Ergen and T-Mobile's John Legere, and would combine a bunch of valuable spectrum Ergen has amassed with Legere's bold marketing operation.

It would also follow the almost-completed merger of AT&T Corp. (T) and DirecTV (DTV), and a wave of cable-system mergers. This is the industry girding for a world of ubiquitous devices, a public desire for on-demand content and a la carte pricing. The conditions for a media merger melee have been in place for a couple of years, and it’s unlikely it’s nearly over yet.