Treasury yields tumble the most in a decade and gold soars, while stocks sit at two-month highs and credit spreads tighten. Markets are telling a lot of stories these days. Divining a unified signal from them has rarely been harder.
(Bloomberg) — Treasury yields tumble the most in a decade and gold soars, while stocks sit at two-month highs and credit spreads tighten. Markets are telling a lot of stories these days. Divining a unified signal from them has rarely been harder.
The ties that normally bind asset classes have come loose. Treasuries and equities both gained last month. Treasury turbulence remains well above stock volatility after March saw the widest gap between the two since 2008. Gold neared an all-time high on rate-cut bets even as credit traders showed confidence in company balanced sheets. And investors keep pouring cash into money market funds.
In equities, the muddled macro picture is playing havoc with views on the health of corporate America. The difference between the best and worst S&P 500 sectors topped 20 percentage points in March, twice the average of the past two decades. Individual stocks are diverging, with lockstep moves down to a rate of 30% from 50% for most of last year. Unsure what to make of it all, strategists have left S&P 500 year-end forecasts unchanged for a third month.
At the root of the confusion is the near-impossibility of predicting paths for the economy, inflation and Federal Reserve policy at a time when stress in the financial sector that — while easing — has yet to resolve.
“Markets look confused and contradictory between the asset classes,” said Peter Chatwell, head of global macro strategies trading at Mizuho International Plc. “They are pricing in the tail risk of a recession, but not as an imminent event.”
A week of below-forecast US economic data, with March’s jobs report due Friday, buttressed arguments that a recession is imminent and the Fed will be forced to cut interest rates. That dimmed optimism among stock investors and left the S&P 500 with its first weekly decline in the past four. Some of the biggest winners in March, including the tech-heavy Nasdaq 100 and more speculative corners like profitless technology firms, underperformed major benchmarks.
US equity markets are closed for the Good Friday holiday. Futures will trade until 9:15 a.m. in New York.
Even after the past four days narrowed some of the diverging paths, longer-term correlations remain divided. The S&P 500 one-month implied equity correlation has tumbled as the top five stocks in the index delivered 161% of the past month’s advance, well above the 41% average of the last five years.
Even if a looming recession continues to weigh on equities and bolster bonds, dispersion among equities is likely to rise further since companies with strong balance sheets and rock-solid earnings would outperform, according to Marija Veitmane, a senior multi-asset strategist at State Street Global Markets.
These situations may also prompt some investors to increase their risk exposure, said JPMorgan strategist Nikolaos Panigirtzoglou. “Low sector and stock correlations suppress index volatility, which in turn induces volatility-sensitive investors to add rather than reduce risk,” he said.
Big money investors have been reluctant to chase the first-quarter stock rally and many investors have stayed defensive, weakening any signal emanating from the equity market. Investors preferred to stash money in yield-bearing instruments, with $60 billion of cash entering money market funds as they withdrew $5.2 billion from global equity funds last week, according to Bank of America, citing EPFR Global data.
“Conviction is low, volumes are low and investors appear to be on the sidelines,” said Emmanuel Cau, head of European equity strategy at Barclays. “Price action in equities and rates feels more driven by short covering than fundamental reallocation.”
–With assistance from Daniel Curtis, Sam Potter and Lu Wang.
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