Investors are riding helter-skelter markets — causing headaches as they try to figure out whether Goldilocks is back or recession is nigh.
From stocks to currencies to commodities, a slew of assets are moving in seemingly erratic ways.
Take the dollar — it has ripped higher ever since the US Federal Reserve took a dovish turn.
Small-cap stocks are among the best-performing US equities out there, even though the only thing everyone seems to agree on is that we’re late in the cycle.
Industrial metals and miners are surging as the world’s biggest consumer slows down.
It all helps to explain the lack of consensus that’s been on display across markets this year.
“It’s very erratic and a clear direction is missing,” reckons Georgette Boele, a currency and commodity strategist at ABN Amro Bank.
“There’s a lot of uncertainty with Brexit, trade negotiations, China’s economy, the weaker eurozone data and unclear picture about US data — this all makes it a very hard market to trade,” she said.
While bulls in credit and emerging markets are on the rampage, government bonds are getting a mammoth bid and outflows are hitting rallying stocks.
There are some other head-scratchers in markets right now.
Expectations of looser monetary policy in the world’s strongest economy would usually be a headwind for the dollar.
Yet after an initial leg lower as the Federal Reserve said it “will be patient” on policy decisions at the end of January, the dollar hasn’t looked back.
The key here appears to be taking the Fed in context — American policymakers may be signalling we’re near the end of the tightening cycle, but in other key regions, the economic and inflationary outlook is even worse.
On a relative basis, therefore, the dollar and US assets remain attractive. Despite the headwind of a rising dollar, emerging-market assets have largely held on to the year’s stellar gains.
Despite this, bearish positioning in options markets on these countries’ currencies and equities is below the historical average, according to analysts at Morgan Stanley.
China is the world’s biggest consumer of big-name commodities, so a slowdown there might be thought of as negative for miners and metals prices, all else being equal.
Gold did indeed enjoy a robust start to 2019, as its status as a counter-cyclical haven came into play. But in a counter-intuitive move, pretty much every industrial raw material seems to have outperformed it.
Looser US policy, particularly on the expectation of slowing growth, should also tend to support gold more than other raw materials.
This dynamic is echoed in stock markets, where basic resources companies are the best-performing sector in the Stoxx Europe 600 Index.
Miners are typically pro-cyclical, making them a risky play this late in the cycle. A rebound from an overwrought sell-off? Think again. To bulls, it’s another clear risk-on signal — and a hint that global growth concerns are overdone.
“The miners are like cowboys, shooting the lights out,” said Rene Hochreiter, a mining analyst at Johannesburg Noah Capital Markets. “All these fears of a recession last year are disappearing.”
the analyst said.
Here’s another set of stocks which are not meant to flourish in late cycle: small caps. These US companies have risen 12% in 2019, outperforming their large-cap counterparts.
That’s happened even as earnings forecasts for the S&P Small Cap 600 Index were slashed by 4%, compared with around 2.5% or so for the S&P 500.
In other words, traders appear willing to take on greater risk for relatively lower returns.
Sure, the dollar, easier credit conditions, and a still-robust US economy all have something to do with it.
But it’s another confusing signal for investors grappling with risk-on, risk-off markets.
Bloomberg