Our newest normal is off to another solid start this week with emerging market equities (EEM) treading water (~ 0.15%) against the downside performance of the SPX (~ -1.0%). Greasing the differentials in the system is the breakdown in 10-year yields over the past three sessions, which we have speculated would further expedite the continued shift this year away from the domestic equity markets and into bonds and commodities.
Over the past few weeks we have pointed out that the banks (BKX) looked particularly susceptible to a move lower in long-term yields as the carry spread they have benefited from over the past two years becomes squeezed. Although commodities and precious metals are off to a tepid start this week, we expect they will continue to benefit from the change in character, as we anticipate the US dollar to roll-over with long-term yields - as well as the outperformance by the SPX this time around the track.
Unlike the upside pivots last summer which was first led by emerging markets - then precious metals and eventually the broader commodity complex, the baton relay has been passed this leg in a more traditional order we would characterize as representative of a broader cyclical turn and not another false start. Like the banks in the equity markets, we follow precious metals very closely because of their tendencies to lead large moves in the commodity and currency markets - as well as emerging economies who typically benefit disproportionally from their respective strengths.