Five Charts to Rule Them All: Global Financial Crisis Unwind Continues

Includes: DJP, FXC, IYR, TLT, UDN, VTI
by: Thomas MacLeod

The global financial crisis unwind continues. In disbelief, many of the trends in financial asset classes that began late last year/early this year are reaffirming themselves. Last night the equity and real estate market (VTI & IYR) closed at highs for the year. During the course of the week the US Treasury market broke to a multi-week low. Could we go so far to say that the weakness in the US treasury market is healthy for the equity and real estate market? Well, it certainly appears that way. Perhaps it is merely a reflection of investors’ appetite for “assets” that at least have some means of protecting against the ravages of inflation. As of this writing, premiums of inflation protected 10yr treasuries are more or less at multi-week highs against non inflation protected 10yr treasuries (Bloomberg: USGGBE10:IND). This suggests that the Dow Commodity ETF (NYSEARCA:DJP) should break to a multi-week high over the coming days. Surely this will be the final straw that breaks the deflationists’ backs. Of course, only time will tell.

And the strength in the USD Index? Yes, a nice little rally but at this stage it is nothing more than a short covering bounce. That being said, given the degree to which the USD Index has been oversold it may well bounce some more. But there is an interesting dynamic developing as of late. Usually strength in the USD Index has translated to weakness in the stock, commodity, and real estate markets and strength in US Treasuries. However, the 3 month high in the USD Index appears to be coinciding with the exact opposite. We are at a loss to explain this behavioural pattern, but we do note that the one currency that is holding out in the face of USD strength is the Canadian. Perhaps being long equities (VTI), commodities (DJP), real estate (IYR), short US treasuries (NYSEARCA:TLT), and long the Loonie (NYSEARCA:FXC) wouldn’t be such a bad position to be in over the coming months.

Disclosure: Long TBT, DJP, VTI, IYR, UDN