By Dany Burger and Sid Verma
You aren’t just imagining it: global markets are flashing conflicting signals as they struggle to price trade friction, an easing of global synchronized growth, and the excesses of an aging bull market.
“It’s a puzzling time for markets, with contradictions in returns, vol. and correlations,” quantitative strategists at HSBC Holdings Plc including Daniel Fenn wrote in a note.
Here we sketch the vexed trading climate in charts.
Rising anxiety over protectionism has created surging stock correlations. But the relative calm in fixed income and FX has perplexed analysts over the past few weeks.
It seems only equity is reacting to political uncertainty, as the asset class that directly influences the terms of trade between nations — currencies — isn’t sounding any alarms.
Meanwhile, two-year interest-rate correlations have fallen to the lowest since at least 2002, data compiled by HSBC show. For the past six months, front-end swaps among a basket of large developed and emerging countries have charted increasingly independent paths, driven by diverging monetary policy, according to the bank.
Not all stock volatility is created equal. For the first time in nearly two years, price swings among developed-market stocks are greater than emerging-market counterparts. Typically, the latter group is seen as more risky with higher volatility to boot.
That raises the question of how assets will shift back to their historical norms — will calm return to developed markets, or will a storm gather in developing nations?
Differences in volatility aren’t just cropping up between regions. Cyclical stock sectors are also behaving in unexpected ways.
Take energy and technology. Commodity shares tend to be more reactive to fundamental shifts given the signals they contain about the economic outlook. But even as oil-price volatility jumped on escalating tensions in the Middle East, it wasn’t enough to overtake tech share swings.
One-month historical volatility for tech stocks has climbed to the highest level compared to that of energy shares in a decade, data compiled by Bloomberg show.
For those attempting to navigate the path of rate normalization and economic expansion, trading over the past month has only muddied the narrative. Judging by declines in some growth-sensitive assets across equities and commodities, disappointing data have shaken investor confidence in the synchronized global story.
Yet a clear bid emerged for securities that protect against inflation. In March, the iShares TIPS ETF posted its best month since August 2017 as its realized volatility barely budged, notes HSBC.
And then there’s the vexing question of the trade-weighted dollar, which has failed to catch a lucky break despite the recent flight to safety and some disappointing European economic data. What’s more, as the copper-gold ratio has weakened — indicating risk-adverse trading — so too has the greenback. The sudden change in behavior reflects the multiple conflicting forces driving the currency, according to analysts.
“Right now, it doesn’t make sense that the dollar has generally been weak, despite the Fed raising rates and the recent improvement in U.S. economic data relative to the rest of the world,” Evercore ISI’s Dennis DeBusschere wrote in a note.
Amid the stock volatility, perhaps the smart money in interest-rate markets and currencies is banking on monetary-policy continuity and sustained economic output. But the case for bulls isn’t straightforward.
“The market is sitting and asking: What is the upside story to the business cycle?,” said Rafiki’s Englander. “It’s harder to tell the positive one — productivity is going to pick up, inflation isn’t going to be that high and the business cycle isn’t going to end anytime soon.”