WE’VE COME A LONG WAY BABY
To say that we have witnessed one of the strongest risk reversals is likely an understatement. Left behind is the market angst created by concerns over China, global growth and the impact that the strengthening U.S. dollar was wreaking on the financial markets. The strong risk rally has prompted U.S. stocks to regain 15% of their losses over the past 2-1/2 months after troughing in mid-February, on their way to +2% -+3% YTD gains. While slower to participate, European stocks have rebounded between 13% and 20% as of late, which has nearly reversed their absolute losses on the year, while returning to neutral on a risk-adjusted basis. Emerging market stocks have been one of the biggest beneficiaries of the improving outlook, buoyed by firming commodity prices and the weaker U.S. dollar. Oil, which has been at the center of the storm, is now 40% higher since the February trough and up to 15% stronger on the year. The move against volatility has been equally impressive, as the VIX has collapsed almost 50%, while fixed income volatility is 30% lower. For their part, rates remain lower on the year, although have returned up to ½ of their yield compression since the risk environment has improved. Some notable exceptions to the stronger rise in yields since February has been in the Bunds and JGB market, which logically is due to negative yields and strong bond buying from their monetary authorities. Another interesting exception to the broader risk rally has been Gold, which is mostly flat since February, but 18% better on the year, making it one of the best performing asset classes this year.