Financial markets have had one of those weeks of frenetic activity when each asset class blames the other for driving direction, few agree on an overall driver and it’s hard to square relative moves. What seems to be true is that idiosyncratic and locally-focussed factors are back in vogue – witness the lunge in sterling as the BoE nods at more QE and higher inflation, or the sudden dive in commodities even as global stock markets nudged 5-year highs. Micro or national issues are getting more play as the stress busting of recent months seems to have reduced cross-market correlations that characterised every ebb and flow of the overarching ‘global crisis’ for years.
To be sure, the longer-range theme of global reflation, the return from “safe haven” bunkers, and a gradual rotation out of low-yielding bonds remains the big backdrop and has helped explain the buoyancy of stock markets to date, the relative weakness of sterling and the yen as persistent money printers into the recovery, and the rise in core US/German/UK government borrowing rates alongside a sturdy bid for Italian and Spanish bonds.
But the week has thrown several curve balls into the mix. Fed minutes showed its policymakers musing yet again over when to wind down QE while euro area business surveys disappointed recovery hopes yet again in February. Commodities have retreated sharply on the perceived demand shock, with the dollar sharply higher on hopes the greenback presses will be turned off well before sterling or yen equivalents at least. But it gets more difficult to square some of the rest – gold’s nosedive this week could be argued as a haven exit perhaps, but its inflation-hedge role seems at odds with Britain and Japan actively pumping up prices. A more hawish Fed and dollar rise might be a better guide. And the drop in oil, metals and world equities (latterly) seems to riff off that too, for all the coalface talk of fund liquidations, supply boosts and chart hoodoos etc. Yet if the Fed slows QE – which would slow its bond buying — then bonds should surely be falling too? Not so – 10-year Treasury yields have slipped back below 2 percent all of a sudden. So is the bond market getting a dollar boost or is it worried about demand slowdown from the risk of a March 1 sequestration? If it’s the latter and that’s justified, then you can expect Fed chairman Ben Bernanke to sound a very different tone at his congressional testimonies next week. But what then of the supposed demand shock from the FOMC minutes? hmmm. It all starts to get a bit circular.