Global equities ended the first week of the new year in full-on melt-up mode.
You can hardly blame risk sentiment for running away from reality. After all, reality is pretty hard to cope with. The pandemic is proving to be just as stubborn as you’d expect a pernicious, evolving biological threat to be and Washington D.C. is a horror-themed circus.
“The US, which is supposedly the cradle of democracy, shocked all of humanity,” Recep Tayyip Erdogan said Friday, in Istanbul. He likened this week’s events in the US capital to the 2016 failed coup in Turkey, criticizing America in the process. Just another autocrat who now has carte blanche to unironically deride America for becoming a banana republic.
Amid the chaos, equities around the world looked ahead to brighter days. South Korea’s Kospi surged 4% Friday, bringing its gain for the week to an astounding 10%. The gauge has gone parabolic.
The rally, in its 10th week, was fueled by “foreign funds who are buying Korean stocks both on the spot and futures market, joining retail investors,” Bloomberg’s Kyoungwha Kim wrote, adding that “a chunk of money in Korea appears to have shifted into stocks, due partly to the government’s curbs on the property market including substantially higher taxes on owning homes.”
The Nikkei, meanwhile, pushed through 28,000. It now sits at the highest since August of 1990.
In Europe, stocks were pacing for their best week since November, while Brent breached $55 for the first time since February. Emerging market equities touched the highest in some 13 years Friday.
Oh, and Bloomberg’s gauge of cryptocurrencies is up 40% — this week.
“Besides the obvious reflation ‘risk-on’ moves across virtually every asset class imaginable, stocks seemingly don’t give a hoot about higher nominal bond yields,” AxiCorp’s Stephen Innes said. “Treasury yields might have risen a little, but what’s important to risk markets is Fed Funds, and that remains at zero,” he added.
To be sure, there’s plenty of nuance to be had if one’s focus is the US rates complex, but to the casual observer, what sticks out is the ongoing surge in pretty much everything despite the move higher in Treasury yields.
The only casualties so far appear to be in EM FX, where the rand, the real, the rupiah, and a hodgepodge of others have come under pressure since US 10s crossed 1% earlier this week.
There may yet be more such collateral damage. But the selloff in USTs still needs to prove it’s sustainable beyond what amounted to a knee-jerk reaction to the Georgia runoff results.
More specifically, the question is this: Can Treasury yields look through the near-term economic drag from the pandemic to settle into a higher range, or will this week’s move be faded as bonds, unlike equities, prove unable to so easily dismiss reality.
