Confused?? Don't worry .... you're not the only one as accepted market dynamics get a little blurred.

Wednesday 9th March 2016

  

Confused?? Don't worry .... you're not the only one as accepted market dynamics get a little blurred.

ref :- "Markets in Limbo: Risky and Safe Bets Both Gain" , Wall Street Journal , Markets.

Over the years we have become used to some basic conventions in the relationships between asset classes. You know the sort of thing :  we can generally expect Sector A to move in tandem with Sector B .... and in the opposite direction to Sectors C and D. Over the last month or so those traditional relationships have been suspended. So we have a situation just now that has seen rallies in riskier assets such as global stocks, US junk bonds and industrial commodities, and at the same time strong gains in traditional safe-havens like gold and the Japanese Yen and a solid performance by ultra-safe government bonds.

For just how long this might last we can't be sure, particularly as it's a development that reflects confusion amongst investors and analysts more than any change in market methodology. They'll be hoping to gain a clearer picture of the way forward after learning the outcome of crucial meetings of the ECB (statement tomorrow) and of the Fed and the Swiss National Bank next week.

It's not hard to identify the sources of confusion. The course of global economic growth is very uncertain, and the rout in commodity prices that in large part sparked the sharp fall in stocks at the start of the year would seem to make investment in this area a very risky game indeed. But with yields so low in other assets (e.g. government bonds) and more monetary stimulus from the ECB expected any minute (and no further tightening from the Fed), the hunt for better returns make riskier bets more attractive than they might have been in different times.

And then there's the Japanese Yen ..... It's perhaps surprising enough that the move to negative rates hasn't presaged a period of weakness (as the Japanese authorities may have hoped but not admitted). But in terms of relationships, the yen fell by more than 10% each year between 2012 to 2014 while the S&P 500 rallied but as the stock index has recovered by about 6.8% over the last month, the Yen has strengthened by about 3%.  

In fact ultra-low yields, and negative rates in particular, have been at the heart of one of the most striking reversals of the norm. Gold has recovered its status as a safe-haven (for now at least) as investors fretted over what negative rates might do to banks' profitability and by extension to the banking system. At the same time, the high yields on offer on junk bonds in comparison to their AAA-rated counterparts have proved highly tempting to investors. Traditionally, we would expect these two asset classes to move in opposite directions. In the event, over the last month, Gold is up 5.4% and junk bonds are up 5.1% (taking the largest junk bond ETF as an indicator).

The markets will continue to be pushed by conflicting forces. Dare one say it, but US data on balance suggests continued respectable growth rather than recession while China's growth slows. And according to people like Goldman Sachs, that means that the recovery in commodities and oil will be short-lived. The message seems to be .... tread gently. Well, you can't say there's anything new in that.