21 Jun A BEFUDDLING MARKET
Is the reflation trade over, the result of surprised hawkishness of the Federal Reserve? Many including me are befuddled about market activity. There is a litany of high-profile investors ranging from Stanly Druckenmiller to Howard Marks to Jeffrey Gundlach to Paul Tudor Jones that is questioning the outsized rally in long dated Treasuries, a rally that is tantamount to one that is normally associated with crisis.
The advance is oxymoronic given the current and expected background. All have stated the advance is not supported by basic macroeconomic principles, suggesting there are perhaps other issues at hand that is creating an extremely unbalanced market.
Is this observation correct? Is the current torrent advance in the 30-year the result of short covering in an illiquid market, a market that is awash with cash searching for a home, trading on technical rather than fundamentals?
Nomura Securities stated Friday’s triple witching hour “messed up the information that we are seeing,” stating both equity and Treasury trading was primarily “the result of option expiration rather than a change in business or economic fundamentals.”
What will happen this week? As noted Friday, thus for in 2021 the indices—specifically the NASDAQ– has the greatest correlation to the bond market since 1999. The reason for this close correlation is obvious…NASDAQ valuations have not been this lofty since 2000 and the primary determinate to equity values are interest rates.
The economic calendar is comprised of several housing indicators, the final print for first quarter GDP, a sentiment indicator as well as personal spending and income statistics. How will the data influence the market?
Last night the foreign markets were mixed. London was up 0.12%, Paris up 0.28% and Frankfurt up 0.74%. China was up 0.12%, Japan down 3.29% and Hang Seng down 1.08%.
The Dow should open nominally higher following the worst week since October. The 10-year is off 1/32 to yield 1.44%.