Your humble scribe is old enough to remember the Kinder egg commercials, which lured kids with the promise of a three-in-one treat. Chocolate, a surprise, and something to play with. Markets feel similar at the moment except they aren’t exactly treating investors; they are posing a riddle.
The year has begun with a rally in stocks, a collapse in the dollar and sharply higher global bond yields. Just as punters seemed to have settled on this constellation of price movements, though, markets threw a curve ball last week. The sell-off in bonds continued, but stocks weakened, and the dollar strengthened. What the heck is going on?
I was never a fan of the idea that a weaker dollar and higher U.S. bond yields signalled investors’ abandonnement of U.S. assets in the face of a shit-show in Washington, aggressive fiscal stimulus and a widening CA deficit. This is especially the case given that we were supposed to keep buying U.S. stocks. That makes little sense if you think that U.S. assets are no longer high quality.
It is relatively simple to make sense of bonds, stocks and the dollar in isolation. But if we want to connect them, our best chance is to start with how bonds impact the two others and work our way up from there.