By Christine Hughes, Canada. Chief Investment Strategist, OtterWood Capital:
That was one wild week in bond markets and it moved absolutely everything else. As I have talked about for the past few weeks, US dollar weakness has put all the dollar contra-trades in vogue. That means a weaker US dollar over the past few weeks has allowed commodities to rally, particularly energy, as they are priced in dollars (people buy more when prices fall). At the same time, global interest rates rallied hard as inflation expectations rose with the rise in energy prices. Here is the path, it’s easier to follow this way:
US dollar rolls over, starting about mid-March:
Crude oil bottoms at the same time and goes up:
Higher energy prices create higher expectations for inflation (note the March bottom):
Higher inflation expectations make interest rates go up everywhere:
Factor in a shrinking keyhole that everyone has to fit through when it’s time to sell and you get crazy moves in bonds (German 10yr yields are up 700% in 3 weeks!!):
Higher bond yields make those stocks being used as yield plays like REITS and Utilities get hurt because bonds look relatively better:
It is a totally connected world, more than it has ever been and it is getting more volatile as central bankers gobble up the world’s supply of ‘safe’ government debt. All the gyrations in the market the past few weeks are a direct result of the US dollar getting overbought and needing a rest/correction. I don’t think it has fully played out yet so we’ll probably have more ‘chop’ in the markets the next few weeks as the dollar tries to find a bottom it can stick to.
However, an interesting statistic I came across this week was that $16 billion worth of withdrawals were taken out of the ‘big four’ US index ETFs (SPY, QQQ, DIA, IWM). It was one of the largest outflows in ten years. Of the other 8 occurrences with an outflow that large, a month later, the S&P500 Index was higher every time averaging +4.2% (Sentiment Trader via Jones Trading). By Christine Hughes, OtterWood Capital
I can’t even begin to think of all the unintended consequences this will bring about. Read… Strange Things Are Happening in European Bond Markets
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.