Friday, March 28, 2014

Offsides

This week we welcomed what we expect will be a new-er normal, with emerging market equities (EEM) outperforming the SPX to the tune of over 4.5%, and commodity currencies - such as the Canadian and Australian dollars each surging a respectable ~ 1.75% for the week. 

The more road that gets traveled this year, the greater confidence we have that the baton is being slowly passed from developed economies such as our own to those emerging markets that have glaringly underperformed over the past five years. Helping to set things in motion this year has been the offsides standings in the bond market, which largely anticipated long-term interest rates to continue rising while the Fed pivoted its policy stance. Our expectations have very much remained countervailing over the past several months, and we believe that divergence will only grow.   

With that said, as much as we field the streams openly with the North American genus of equity bears, we are cognizant that our longer-term expectations will likely diverge downstream from their more considerable appetites. From long-term and varying perspectives of valuation and momentum, we continue to view the market with the greatest similarities to the cyclical peaks in 1946 and 1981, respectively - which saw the equity markets correct and consolidate more discretely (in nominal terms). 

Should 10-year yields continue to breakdown next week as we suspect, it will likely present another headwind for the financial sector, but provide a strong trade wind to commodities, precious metals and those currencies closely correlated.