TOO MUCH TOO FAST
Last week we proffered that we were in the midst of a strong risk on trend, and it made sense to simply go with that flow. For the more short-term oriented, this has made sense as we have seen practically all global bourses posting strong gains over the past four weeks, while commodities have rallied and volatility has fallen from between 12% and 30% across different asset classes. Credit has also broken many negative trends, with investment grade spreads dropping by their most significant levels in over two years, while junk yields are now trading at levels below where they began this year. Global sovereign yields have not correlated as cleanly however, with treasury yields (along with gilts) noticeably higher over the past month, while rates for EGBs and JGBs have fallen to, or through historical lows (which often have a “minus” in front of them). This is of course consistent with the central bank put that has become the market’s go to crutch over the past several years. This certainly leaves us in a quandary as we are not as mesmerized by the soothing words from the world’s central bankers as we once were. We have questioned monetary policy efficacy during this latest cycle of central bank largess and felt somewhat vindicated by the less than typical response from investors after the BOJ and ECB once again opened their purse strings. This has included the continued strength in the Yen and an initial weakening of the Euro that turned into a four-figure reversal as the common currency closed stronger on the day. There have been idiosyncratic issues with each of the programs, but that affirms our belief that all boats can no longer rise with the tide of central bank liquidity.