“People feel like something has got to give.”
That’s how one market strategist describes the motivation for a popular trade right now – betting that the wild volatility upending many asset markets across the world will eventually invade the calm that's been enveloping U.S. stocks.
This quarter is on course to be the worst for government bond returns globally in some 30 years. Corporate-bond prices are suffering from the yield lift and a rush of new debt issuance. Outflows from emerging-markets stock funds in the past week were the heaviest since 2008. Greek stocks have resumed their free fall as bailout talks falter. And currency market volatility has soared.
And yet, once again, the American stock market has remained steady to the point of being sleepy, lolling around near record highs without registering either panic or enthusiasm.
The market strategist quoted above says that this apparent disconnect in cross-market anxiety levels is leading big traders to bet heavily that it can’t last, and that the volatility in U.S. stocks will pick up in coming months. While this makes sense on paper, it’s also true that when such a trade looks obvious to so many it often fails to come together.
Meantime, at least for the moment, some of those other markets might be calming ever so slightly. German 10-year bond yields – having shot up from 0.08% to above 1% in mere weeks - have settled back below 0.9% in recent days. Yesterday, in fact, saw the largest one-day drop in German bund yields in more than two years.
Now while this is partly a safety-seeking response to the Greek standoff, it did clear the way for other bond markets to take a breather, with U.S. 10-year Treasury yields (^TNX) dipping back a bit too. Pretty much everyone agreed that near zero was not the “right” level for German yields and perhaps that below 2% made little long-term sense for Treasuries.
But the speed at which those yields surged away from that “wrong” price got markets ruffled, and so relative calm is to be welcomed at this point. It’s not usually advisable to say that the stock market has it right and larger, deeper, more focused markets such as government bonds and currencies are misguided. It’s usually the other way around.
And it’s hard to see how equities could go too much longer resisting continued turbulence in other investments. But for now, maybe the stakes are simply greater for those other markets when the known catalysts are central-bank action, currency flows and international debt agreements.
Some are making the case that in this cycle, the assets that were perceived to be safe – such as government and corporate bonds – got most distorted following the financial crisis, and stocks are just tagging along.
Maybe so, though this is a bit too tidy a story told by folks with a vested interest in rising share prices. Still, the more investors here have their focus drawn to corporate news such as Twitter Inc.s (TWTR) strategic outlook, Boeing s (BA) production slate and whether T-Mobile US Inc. (TMUS) will indeed be acquired, the better off we’ll be – even if stocks stay boring for longer.