The credit markets tend to smell fear long before equities wake up to the risk. This has been the pattern in each spasm of financial stress over recent years, but these early-warning indicators can be hard to read and right now they are sending mixed signals. The iTraxx Crossover index for European bonds  has crept up to 330 basis points but is not suggesting trouble.

What is clear is that conditions are tightening in the US. The Fed is already draining money through “reverse repos”. Even blue-chip firms in the US are stretching payments to contractors in order to disguise weakness and beat cash flow “expectations”.

Jonathan Tepper from Variant Perception said: “Some companies are delaying paying suppliers and increasing accounts payable, which flatters operating cash flow. It is a low quality ‘beat’.”  This creates headaches for suppliers at the bottom of the food chain.

The small business optimism index (NIFB) in the US dropped to 94.1 in September, a very weak outlook. Although growth of nominal GDP rebounded from 1.2pc to 2.8pc in the third quarter, this was distorted by inventory effects and by a one-off jump in soybean exports. The underlying trend in “NGDP” is near stall speed, and suggests “stagflation”.

The US trucking association said freight tonnage fell 5.8pc in September.  The moves in Libor and the bond markets are not dramatic compared to past episodes in 1987, 1994, 1999, and 2006, but the great unknown is whether today’s globalised worldcan cope with any tightening at all. 

Bond bulls remain defiant. They insist that the spike in yields will inevitably do so much damage that the process must short-circuit by slowing the global economy, halting the rally in commodity prices, and killing off talk of an inflation cycle. Nomura’s global strategist Bob Janjuah said: “We are in an era where we still have too much global capacity versus aggregate demand. The default cycle is lurking in the background.”  

“More QE by the Fed is at least as likely as the Fed hiking by 100 basis points between now and Christmas 2018. Buy the bond bubble.”

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