I think most would agree the last 45 days the unexpected has occurred. The most unloved stocks are outperforming the most loved stocks (aka mega capitalized momentum growth issues) in the greatest equity reversal since 1933, the dollar falling to a 17 month against the yen, oil surging 50%, and a large recovery in non-investment grade rated bonds.
What will occur the next 45 days? JP Morgan’s Dimon stated one of his greatest concerns is a spike in interest rates and Treasury yields.
Most are ignoring any suggestion of higher interest rates for the simple fact all have been wrong time and time again when such calls are made. In my view, the complacency or the sanguineness of the market is frightening especially given the illiquidity of many fixed income markets the result of regulatory over reach.
I can write volumes about what happens when liquidity evaporates using the 20 month rout and then the 1 month surge in the high yield market as an example.
What will cause an unexpected surge in interest rates or Treasury yields? To write the obvious, stronger growth, rising wage pressures, increasing home and oil prices. In my view, all of the above is now occurring.
I have written extensively about how the equity market is closely correlated to oil. The correlation between oil and the bond market is now rising according to JP Morgan research. What happens if oil rises to $50 in the intermediate future, which incidentally is the forecast of many reputable firms?
Regarding housing and wages, OER has moved considerably off its multi-year lows and wages are accelerating at either end of the spectrum. I think the bond market has not digested the significance of either, especially the rise in OER which is about 30%-31% of inflation indices.
What happens if global growth accelerates as March data is suggesting?
I am not suggesting there will be a spike in yields, rather stating my opinion the markets are ignoring the possibility of such. Based upon yields and complacency as well as money flows into treasury/bond ETFs, few if any expect yields to rise.
Commenting about yesterday’s market action, equities posted their greatest losses in two months on growth and earning concerns. The yield on the 10-year Treasury fell to the lowest level since February 11. Oil was essentially unchanged.
Last night the foreign markets were up. London was up 0.81%, Paris up 1.19% and Frankfurt up 1.19%. China was down 0.83%, Japan up 0.46% and Hang Sang up 0.51%.
The Dow should open moderately higher as oil is up about 4%. The 10-year is off 10/32 to yiled 1.73%.
