A rising stock market, rising Treasury yields and a firming dollar seems like an abnormal trading relationship post-financial crisis, but the recent correlation between these markets may be signaling more confidence in the U.S. and more ‘normal’ times ahead.
The question is whether this trend will last, while for so many years the markets moved in lock step – either “risk on” or “risk off.” When the markets were risk on, the dollar weakened and riskier assets rose, such as commodities and stocks. The dollar would strengthen in “risk off” times, when fear gripped markets, and Treasury yields would go lower as investors rushed into bonds. But now it is the yen wilting, and commodities are going lower, not higher, as U.S. stocks soar to record highs.
“The funding currency is the currency most apt to go down as equities go up,” said Alan Ruskin, head of G-10 currency strategy at Deutsche Bank. “People are reluctant to use the dollar just because its fundamentals are better than a lot of other currencies. All of this relationship is about fundamentals.”
The Dow and S&P 500 closed at new highs Tuesday. The S&P was up 16 at 1650, and the Dow was up 123 points at 15,215. At the same time, bond yields ripped higher, with the 10-year reaching 1.98 percent in late trading. The yen continued to weaken with dollar/yen trading at 102.28. The euro also weakened slightly against the dollar. Gold and metals moved lower, and West Texas intermediate crude was down about a percent.
Weakening commodities prices are being affected by the rising dollar, but also concerns about weakness in China and other markets. “It’s fascinating that three markets (bonds, stocks and commodities) are completely in disagreement about the fundamental, economic and policy backdrop,” said Jeffrey Kleintop, chief investment strategist at LPL Financial.
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