The World Financial Markets in Eight Charts

Capital continues to flow into high yield assets.

That statement pretty much sums up the trends in place across the global financial market asset classes; equities, corporate bonds, and currencies.

Last we saw, US Treasuries were finally showing the weakness we have have suspected will arrive. The long dated US Treasury ETF TLT has now had three negative weeks with last week closing down 0.52%. Is this enough to signal a new downturn in US Treasuries?

Well not quite. We would look to see TLT close below 90 before concluding, from a technical perspective at least, that the bear trend in US Treasuries that started in late December last year has been confirmed.

Of interest is the breakdown in the correlation between US equity markets and US Treasuries. Usually when equity markets weaken US Treasuries rise, but this has not been the case as of late. Perhaps US Treasuries are now starting to follow the lead of commodity markets; TLT is closing lower in the face of a reasonably strong USD! It is getting increasingly difficult to put forward a bullish case towards US Treasuries!

To be honest, the big "unknown" we have is the consequences of a fall in US Treasury prices (i.e. TLT). What will happen to markets if/when (when) TLT makes a multi-week low (closes below 88)? Perhaps it could be a case of better the devil you know than the devil you don't.

That being said, we think that the US Treasury market is the last piece of the jig-saw puzzle. Falling long dated US Treasuries should be confirming evidence for the rally in commodities (the inflation trade). We also think that falling US Treasuries are unlikely to be supportive for the USD. As far as equity markets go funds coming out of US Treasuries have to find a home and we think that home will be in equities, commodities, and offshore bonds (BWX). Of course let us see what transpires.

Equities

A slightly negative week for world equity markets but no loss of upward momentum in both the major market indices and the broad market.

Treasuries

The relative strength of Junk bonds compared to US Treasuries is telling. If there was a hint of risk aversion junk bonds would sell off without hesitation. Yet they made another multi-week high last week.

Commodities

Commodities across the board continue to break to multi-week highs in USD terms and now the big CRB index is within a few percent of breaking to a multi-week high in EURs and JPY. It seems that global inflation is coming sooner than the average economist and his analyst anticipate.

Currencies

We don't remember a time where we have had such linear behaviour in currency markets! It is just a trend trader's dream right now, short the USD and long high yield currencies (relative to low yield). There is no loss of momentum that would suggest this yield seeking condition is under threat!

So we go into this week continuing to be positioned for upside in equities, commodities, high yield currencies, corporate bonds, and downside in the USD Index and US Treasuries.

Disclosure: Long VTI, GWX, EEM, DBC, SLV, DBV, TBT, JNK, UDN.

Comments

[richjoy403:]

Thanks for the info.
Wow, you make it look so easy.
I guess it works...until it doesn't.

Oct 26 07:08 AM

[Moon Kil Woong:]

All the charts point to one thing only. There is a whole lot of loose US dollars sloshing around and Bernake and the Federal Reserve either want it that way, are asleep at the wheel, don't really care, or are intentionally setting everyone up for another collapse by unbridled easing right before they slam on the breaks and watch everyone lose all their equity yet once again.

If the last case is what is going on, then Bernake not only studied the great Depression he wants a replay. Perhaps he thinks it's good for his acadenic career. He can write a new thesis and go on a lecture tour. I'm sure Goldman Sacs and Paulson Inc. would be happy to fund it.

Oct 26 07:08 AM

[MarkitWacha:]

TLT is being manipulated by Fed purchases, so it's important to hedge with commodities, before they're manipulated, too.

Long: DBC, TBT

Oct 26 09:49 AM

[AndrewBaker:]

Commodities are real assets, whilst the dollar is not: just a promise, and one that less and less people believe anymore.

Oct 26 10:10 AM

[Daily Trading:]

Thanks for your insightful comment!

You are going to be really something when you grow up.

On Oct 26 07:08 AM richjoy403 wrote:

> Thanks for the info.
> Wow, you make it look so easy.
> I guess it works...until it doesn't.

Oct 26 07:30 PM

[Mr. G:]

The surprising metric is the continued market for tipps and treasuries notwithstanding the dollar decline. I suspect a depreciating dollar helps us out of a crisis as the US pays back a depreciated currency at time of redemption. No wonder everone is screaming about the dollar as a reserve currency, yet they keep on buying. Truly one of the great mysteries of the present stance of the global markets.

Oct 26 11:13 PM