“It’s a macro tape, you’re just living in it”, Nomura’s Charlie McElligott wrote Wednesday morning, underscoring the notion that markets have become a slave to coronavirus headlines and, to a lesser extent, the ebb and flow of the Democratic primaries in the US.
On Tuesday night, I wrote about the perpetually applicable “investors want to be long USTs” chyron, a fixture on business television. Because the Fed is on hold, curve directionality is dictated by the long end, which means a bias for incremental bull flattening in the current environment.
“UST cash curves are again bull-flattening in grinding fashion off the back of sustained coronavirus ‘global growth scare’ concerns”, McElligott went on to write Wednesday, before making a couple of quick points about gold’s run, which he attributes at least as much to US real yields hitting multi-year lows as to any haven bid.
But the really notable thing about gold’s most recent move higher, Charlie remarks, is that “it’s come in the face of the US Dollar Index making nearly three-year highs” (see the bottom pane). So much for the negative correlation between the greenback and polished, yellow paperweights.
The dollar is now an economic outperformance/safe-haven story, spiced with expectations of more monetary policy divergence as global central banks are forced to ease more aggressively than the Fed as the virus impact ripples across Asia and Europe.
McElligott reinforces that, noting that the dollar’s climb is in part due to the euro’s “slow-collapse into the market’s heightened ECB rate-cutting expectations”.
In equities land, Charlie offers this visual summary:
Meanwhile, JonesTrading’s Mike O’Rourke delivered a delightfully colorful assessment of the situation. “We are operating in an environment where mania has taken hold”, he said late Tuesday, after markets held up reasonably well despite Apple’s revenue guide-down.
O’Rourke wasn’t done. “Retail has re-engaged en masse in the form of zero commissions, the FOMC is pumping liquidity at the same pace it was during the heyday of QE1, passive managers and index products have no choice but to buy, and active managers can’t afford to sell in this environment”, he went on to say, before driving it all home with this:
In most investing environments a withdrawal of guidance on a holiday would have been a red flag met with massive selling pressure knocking a company’s shares more than 10%. The liquidity and euphoria has people behaving in the one-mentality of the early 1970’s and the late 1990’s.
So… buy the dip?