It’s bullish business as usual in world financial markets. When we say bullish business we are referring to capital continuing to flow into high yield assets. It seems that there is an insatiable appetite for high yielding assets across different asset classes including equities, corporate bonds, and currencies.
The major development last week was the continued breakdown of US Treasuries. The long dated US Treasury ETF “TLT” has now had three negative weeks with last week closing down 0.52%. Is this enough to signal a new downturn in US Treasuries? Well not quite. We really need to see TLT close below 90 before we can conclude, from a technical perspective at least, that the bear trend in US Treasuries that started in late December last year has been confirmed. We have been rather interested as of late in the breakdown in the correlation between US equity markets and US Treasuries, usually when equity markets weaken US Treasuries rise, but this has not been the case as of late. It seems that US Treasuries are marching to the tune of their own drummer in which the tone is sounding increasingly bearish…….or perhaps US Treasuries are now starting to follow the lead of commodity markets. On Friday there was more bearish behaviour in US Treasuries with TLT closing lower in the face of a reasonably strong USD! It is getting increasingly difficult to put forward a bullish case towards US Treasuries!
To be honest the big “unknown” in world financial markets is the consequences of a fall in US Treasury prices (i.e. TLT). What will happen to markets if (actually we think when) TLT makes a multi-week low (closes below 88). Equity and currencies have been characterized by reasonably clear trends over the last few months (commodity trends have only become apparent over the last few weeks) in the face of a US Treasury market that has gone sideways…….bizarre inter market behaviour can occur when asset classes change trend, or at least break to multi-week highs/lows. Often it is better the devil you know than the devil you don’t.
That being said, we think that the US Treasury market is the last piece of the jig-saw puzzle. Falling long dated US Treasuries should be confirming evidence for the rally in commodities (the inflation trade). We also think that falling US Treasuries are unlikely to be supportive for the USD. As far as equity markets go funds coming out of US Treasuries have to find a home and we think that home will be in equities, commodities, and offshore bonds (BWX). Of course let us see what transpires.
Equities
A slightly negative week for world equity markets but no loss of upward momentum in both the major market indices and the broad market.
Treasuries
The relative strength of Junk bonds compared to US Treasuries is telling. If there as a hint of risk aversion junk bonds would sell off without hesitation. Yet they made another multi-week high last week.
Commodities
A picture says a thousand words…….commodities across the board continue to break to multi-week highs in USD terms and now the big CRB index is within a few percent of breaking to a multi-week high in EURs and JPY. It seems that global inflation is coming sooner than the average economist and his analyst anticipate.
Currencies
We don’t remember a time where we have had such linear behaviour in currency markets! It is just a trend traders dream right now, short the USD and long high yield currencies (relative to low yield). There is no loss of momentum that would suggest this yield seeking condition is under threat!
So we go into this week continuing to be positioned for upside in equities, commodities, high yield currencies, corporate bonds, and downside in the USD Index and US Treasuries.
Our wealth creation portfolio is up 22.23% since the beginning of the year with approximately 40% of the volatility of the S&P 500. This portfolio is not leveraged.
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