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Economic Review |
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6/02/09 Which market will show its true colors first…Treasuries, the US$ or Equities Over the past few weeks there have been extreme moves in a sustained direction in a number of US financial markets, however these moves usually aren’t sustainable on a complementary basis over the medium to long term. So which market will break its trend first….Stocks, Bonds or US$s? US 10 Year notes have added about 120 basis points in Yields (roughly 50% of their outright Yield) over the past few weeks while the US$ has dropped about 10 big figures via the EURO or about 8% over the same time and finally the S&P500 has risen about 200 points or about 40%. Now there are logical explanations of why some markets can move in tandem for sustained periods on a complementary basis (e.g. increased profit for US multinationals from a falling US$ result in higher Stock prices; the reallocation of funds from Fixed Income to Stocks result in higher Yields and higher Stock prices), but at this juncture we have not two, but three sectors in major and extreme trends. One of these moves doesn’t make sense and will probably experience a noteworthy setback at some point. Higher Yields may bring international investment back to the US and strengthen the US$ but higher Yields increase the cost of capital for companies and eat into profits, thus hurting stocks, while a reallocation back to Treasuries may suck some air out of Stocks. Which one is it? Keep an eye on our daily analysis.
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| Stephan Kudyba (MBA, PhD) THE MARKET DOCTOR |
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