Precious metals are getting pummeled this morning as real rates rise amid vaccine optimism and hotter than expected inflation data...
Bonds are also getting slammed with 10Y Yields back above 60bps at 10-day highs...
As Nomura's Charlie McElligott reiterates (from his call last week), "inflation expectations" are beginning to adjust higher - Inflation swaps in U.S. and Europe (fickle traders, no doubt) are beginning to tell a story of nascently accelerating global views towards forward inflation - something that was inconceivable to nearly all just a few months ago and now coinciding with the back-to-back weeks of U.S. M2 decline, showing a decrease in risk-aversion and saving and a “less bad” economic outlook from corporates.
And as real yields rise, gold prices fall...
As the Nomura MD has noted over the past few weeks, the SPX macro factor regime has transitioned from “Liquidity” macro factor measures which led the March Equities recovery:
1. Fed QE Expectations - 1y5y USD Rate Vol,
2. Fed Rate Cut Expectations - ED$ Curve,
3. USD Liquidity - FX Basis Swaps
...now into “Growth” inputs as the largest POSITIVE price-drivers for S&P 500 in the factor PCA model:
1. US and EU GDP NowCasting and
2. Inflation Swaps
But the most dramatic impacts of the reflation trade inflection are evident in the broad equity markets... where Nasdaq (tech - growth focused) is tumbling as Small Caps (financials/energy - value dominant) surge...
And as McElligott notes, US Equities factors are showing the most glaring expression of the market’s flat-footedness in their growth- and inflation- skepticism (and evidencing itself in the crowded “Everything Duration” Momentum-positioning which is evidently being de-grossed by somebody):
The current iteration of this U.S. Equities factor “Value / Momentum” swing (5d aggregate % chg) is a doozy, ranking as in the top six since at least 2010, going hand-in-hand with monster thematic- and sector- reversals.
The question is - how high will The Fed let nominal rate rise before it stomps on this reversal? As Morgan Stanely recently warned:
To be clear, we think that overall equity and credit markets can weather a modest rise in yields, driven by better data. Risk assets have frequently been happy to trade a better growth outlook for a higher discount rate, and we saw this pattern as recently as Monday when global PMIs surprised to the upside. But the rise in duration across asset classes, at its most expensive levels on record, suggests that the transition won’t be smooth.
Whether one is active or passive, August appears to be a good time to evaluate, and be honest about, your cross-asset duration exposure.