Friday, April 11, 2014

Yield to Yields

10-year yields slid into their skipped-stone support from the breakout range they have meandered in since last summer. They then broke through mid-morning, accelerating the downside reversal in the equity markets and a strengthening bid beneath the yen. 

Clearly depicted in the chart below, the strong inverse relationship between these two risk proxies have tightened considerably as our own domestic equity fronts have collided with several different pressure systems. Namely, the trap door we have expected would open in Japan - and participants beginning to come to terms with the end of QE. As the markets flounder further and volatility creeps higher, we suspect that the discussion surrounding QE and its impact to the market will only grow louder and more confusing.  
What we do know is that while correlations may be strengthening in some corners of the market, the indiscriminate tightness we witnessed across assets in 2011 as the Fed last attempted to step away, or 2008 as the Fed rushed to the accident scene - are not present. It really has become a market-picker's market in 2014. 

A snapshot of this weeks performance through Thursday's close tells the story. 

                  SPX  -1.75%                                       US Dollar Index -1.35%
                  IBEX -3.19%                                      Euro +1.33%
                  Japan   -4.49%                                   Yen +1.72%
                  EEM +1.28%                                      Australian Dollar +1.34   
                  CRB +1.78%                                     Gold +1.21%
                  FXI +2.98% (SSEC + 4.43%) 

As the banks (already down ~ 4.0% for the week) get hit once again this morning on the back of considerably weaker then expected quarterly profits from JP Morgan, the downside catalyst will only reinforce the trend and negative divergence that long-term yields had pointed towards in the financial sector over the past few weeks.

An inverse to last years sentiment and structure, participants need to yield their considerably misgiven perspectives to yields. Those that have followed our work over the past four months (see Here) will know that this has been a major theme and imbalance that we have positioned off of.  

Closing out an important and powerful week, we updated several different ongoing series.