Via Bloomberg's Richard Breslow,
Stock markets are flying. Credit spreads are tightening in a parabolic fashion. It makes no difference whether it’s investment grade credits or high yield. Presumably there isn’t a risk to be found in the world. Gold prices are showing definite signs of stalling without even testing the next area of resistance the metal was widely expected to blow through. Who can be bothered with safety? The most negative thing you will read is someone saying this is a tactical rather than strategic opportunity to ride carry to first-half glory.
And then have a look at yields on global sovereign debt to sober you up.
There isn’t any way to explain the prevailing level of rates, other than people are scared amid all these upbeat prints on their screens. This has nothing to do with risk parity. Bond buyers aren’t hedging their equity longs. There is simply a presumption out there that the rate-hiking cycle is over.
The forecast timing of rate hikes, anywhere, keeps getting pushed back. It is like taking a picture of someone standing at the edge of a cliff and telling them to step back so you can get a better view. At some point, they just end up falling off.
The latest example of this everything is good because the economic outlook is dimming occurred this morning when the Reserve Bank of Australia’s Governor Philip Lowe surprised the market with his own version of the dovish pivot. Out with the tightening bias, in with global headwinds. The relative probabilities of a rate cut and a rate hike are now described as appearing “to be more evenly balanced.” Can you move back a little so I can get a better view is the new data dependency.
So much for flying iron ore prices and Chinese easing measures curing all that ails. What was the result? Equities up, bond yields harpooned, currency down. The financial condition index is screaming all is good. While the futures market odds of a rate cut soared. Because you cut rates when everything is good. Don’t you?
At least Germany’s DAX index had the self respect to pause its stellar start to the year after today’s horrendous factory orders numbers. Being inside the euro does sometimes have its limitations. But the currency did fall, and with bund yields scraping along well below all of 20 basis points, it’s hard to get too optimistic.
Is it any wonder that analysts are no longer musing on the vague possibility of another round of targeted long-term refinancing operations by the ECB and are already looking at how and when they will be announced? And some still expect to see the euro aiming for the moon.
But it’s a good time for central bankers to be cautious. They have less room to combat a slowdown than they like to portray. They know it and, say what you will, something has clearly spooked them. Meanwhile, this renewed U.S. and Fed academic interest in the efficacy of negative rates is a waste of ink. It has no chance of being enacted and Fed independence surviving the exercise.
Stocks have lots of opportunities on offer. Currencies are most definitely in play. But until bond yields can sustain even a little bit of the animal spirits they showed early in last year’s fourth quarter, you will have to go back to trading like we were taught in the aftermath of the financial crisis.