WHAT’S DIFFERENT THIS TIME
On the surface the volatility we experienced last week was reminiscent of many other risk-off flare ups that we have experienced over the years. The more recent bouts of volatility have been spurred by anticipated changes in monetary policy, with those asset classes and currencies benefitting the most from central bank largess often at the center of the storm. In many ways, this was evident last week, as high yield and equities were in full meltdown mode, posting price moves that have not been seen all year. Additionally, the rush into treasuries had a panicked tone, with the 60 bps swing in 30-year yields last Wednesday representing volatility not seen since the height of the financial crisis. However there were also interesting differences in the price moves last week versus other risk off periods. In particular, emerging market currencies and securities were surprisingly stable, standing in stark contrast to their leading role in the market’s volatility at the start of the year. Additionally, the moves out of equities were not universal, with small cap actually posting gains last week. If we would have speculated last Wednesday that stock indices would be in positive territory this week we would either have been labeled a genius or mad. But lo and behold, the tally of return since the start of last week shows the Dow slightly in the green, the S&P up almost 2%, and the Russell surging an impressive 5.7%. Even European bourses are flat to higher over the past week, despite the EZ’s prime role in driving much of the last week’s hysteria. A select group of returns are presented in the table below, with the main highlights being the weaker USD against most major currencies and a large swath of emerging currencies. As mentioned, most broad stocks indices have recouped all of their losses, with valuation playing a large role in determining the leading and lagging sectors within the S&P. Yields are generally lower, incorporating a longer ramp before lift-off, while the curve is generally flatter through the belly and slightly steeper out the long end. We will also point out that HY posted at total return of 1.1%, with the broad HY index sitting just below 6% for the first time since September. Investment grade bonds also posted positive total returns, although spreads are marginally wider, sitting at the +120 bps mark, which has proven to be a level that investors have been comfortable with over the past year.