October intensified the regime shift already visible in September. The month began with sovereign bonds still absorbing the combined effects of renewed monetary tightening, heavy supply, fiscal anxiety and a worsening energy shock. Ten-year US Treasury yields remained above 5%, long-dated European yields stayed under pressure, and the stronger dollar tightened conditions further for energy importers and emerging markets. Oil extended its extraordinary advance, while gold weakened and the previously dominant AI complex lost momentum. Pictet describes the preceding bond sell-off as the largest weekly Treasury decline on record, with ten-year yields above 5.2%, thirty-year yields above 5.5% and oil up almost 18% over the review period.
Read MoreI have augmented my US equity sector chartbook with two more similar chartbooks; a simple one with the four major factors—value, momentum and minimum volatility—and one with global country equity indices ex-the US. The factor chartbook uses the iShares global factor ETFs—IWVL, IWMO, MVOL—and VEU for a non-US factor. The global chartbook also uses iShares country ETFs. I have also corrected some errors in the cross-calculation statistics and the corresponding Z-scores.
The latest versions of the chartbooks can be found here (US sectors), here (global beta ex-US) and here (Factors), with there accompanying portfolio statistics here here and here.
Read MoreI was out for a run this weekend with a friend who also works in the financial industry. As we sat down afterward over a cup of tea, our conversation turned—unsurprisingly—to the risk of a Black Monday tomorrow. This, in case you’re wondering, is how investors are spending their weekend: nervously looking ahead to next week’s open. Accidents happen in financial markets, but it’s not often they’re triggered by policy errors as egregious as the one we saw last week from Donald Trump. Not to worry, though; Mr. Trump and his team have a habit of throwing mud at the wall to see what sticks. This one, clearly, is sliding down pretty quickly. So they’ll walk it back, right?
Read MoreI’ll keep it short this week, mainly because I don’t have much new to say. I continue to think that the tug-of-war between markets and monetary policymakers in fixed income markets remains the key spectacle to watch, even if I concede that we have been watching it for a while. There are economists and strategists who will tell you that policymakers are perfectly happy with steepening yield curves, and that they in fact welcome them. To believe this, however, requires that you forget the initial stages of the pandemic-policy response in which central bankers solemnly pledged to print as much money as needed—via QE—to keep rates pinned across all maturities in order to support the monumental fiscal efforts needed to prevent economic disaster. If you’re telling me that this tacit agreement is now broken on the eve of the new US administration is about to shovel €1.9T into an almost fully vaccinated economy—that’s just shy of 10% of GDP for those wondering—I have to concede that yields can, and likely will, move a lot higher. But is that really what you’re telling me? It seems to me that observers have quietly pivoted towards the idea that central banks obviously accept, even want, higher bond yields to reflect the recovery. I am sorry, but that doesn’t pass the smell test. While a steepening yield curve sows the seeds of its own destruction via an ever more attractive roll and carry, especially with fwd guidance on the front end, there is always a risk that markets end up questing the commitment to low policy rates.
Read More