Where In The World Is Jemima Kelly? (dancing the apocalypto)
As a side note, when dealing in end-of-the-world derivatives always, always demand collateral. Upfront.From Bloomberg:
More after the jump.....
Below its sleepy surface, a breakdown in momentum trades rattled the floor of the U.S. equity market this week. But before getting too worked up about damage to the math whizzes who bore the brunt, it’s worth considering some of the episode’s happier implications.....MORE
While it doesn’t sound like it, in this topsy-turvy market, trouble for high-flying stocks isn’t altogether bearish. That’s because plunging Treasury yields have been persuading hedge funds for a while now that a recession is at hand, luring them into defensive industries like utilities and real estate. As those shares were bid up, companies like American Tower Corp., a REIT, and household product maker Ball Corp. started dominating momentum portfolios.
Then something unexpected happened. Treasury rates reversed course, jumping faster than any time since Donald Trump was elected president. Whether it was improving economic data, signs inflation was back or a relatively quiet week on Trump Twitter, suddenly the rationale for defense was under siege. In a market that didn’t go far, both Ball and American Tower plunged more than 7%.
“We may have gotten to peak recession fear last month,” said Steve Chiavarone, a portfolio manager with Federated Investors, which has over $500 billion in client assets. “The market has been discounting whether or not the expansion continues -- we’ve been trying to do that for 12 months. What it’s telling us right now is we’re more optimistic about how it’s going.”
One way of framing the events is that the economic signal from stocks just got a leg up -- for now -- over the one flashing from bonds. A debate has raged all year between the asset classes over the direction of the economy, with falling and inverting rates in Treasuries signaling gloom, and the resiliency of the S&P 500 -- up 20% in 2019 -- suggesting otherwise.
Vestiges of skepticism have lingered in equities -- hence the defensive nature of its rally. But that began to crack this week. Banks led the advance, gaining almost 8%, while energy, industrial and commodity companies surged more than 3%. That added to the pain of hedge funds, who had shorted offensive industries as aggressively as they bought defensive ones.
Before this week, as fast as stocks had risen, so had bonds, sending U.S. 10-year yields below 1.5% at the end of August in the strongest rally for Treasuries since 2008 as central banks around the world eased, growth appeared to slow. Lower for longer became the mantra and equity investors positioned for such a scenario, piling into stocks coveted for their high dividend yields and defensive characteristics.
Whether it was data showing a buoyant U.S. labor market and services sector, a surge in corporate issuance or simply an overbought Treasury market, the change this week was jarring. Even with the Federal Reserve poised to cut rates next week, a more conciliatory tone over U.S.-China trade and hot inflation exacerbated the unwind, and a swift backup in yields rattled what had become the safe stock trade.
Two views on what caused the change:
Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets: “As we approach the Fed and as we have realized the ECB rate cut, the pendulum of expectations is now swinging back in favor of another round of reflationary pressures. And the fact of the matter is that the rally got overextended in August. And as cooler heads prevail and as people start to project toward the end of 2019, it follows intuitively that we would see a bit of a correction higher in rates.”....
