One of the points that we have emphasized to clients in our most recent reports has been the risk of a reversal in the USD. Fundamentally, the USD looks better than most, but nothing goes up in a straight line and speculators have been complacently long.
Our leading indicator for Brazil continues to imply significantly higher growth in Brazil and the economy is starting to respond. Of course, recent positive growth surprises have taken a backseat to the increase in EM market volatility . The Brazilian real has weakened, equities have sold off and yields have risen driven by a rise in US 10y yields. That together with a hawkish central bank has added to the squeeze on economic activity.
No-one ever said that investing was easy, but when textbook correlations start to break down it can be outright painful. Such of course has been the environment in recent couple of months with stocks and bonds falling in unison. It won’t last forever, but it may persist for a while longer.
We have been warning clients in the past few months that volatility was set to rise towards the middle of the year. We have been flagging the almost parabolic increase in margin debt as well as our leading indicator for equity volatility.
The underlying outlook for inflation in the US continues to point to upside risks in the coming years. Endless discussions between hyperinflationists and deflationists are boring and unproductive. We prefer to look at the data and the data is pretty clear.
Last week’s BoJ meeting did not meet expectations of trying to soothe the Japanese bond market. Yields have shot up, with 10y yields 50% higher in May as of this morning, largely a consequence of the BoJ succeeding in raising…
The developed world remains mired in the debt crisis that roiled the global economy in 2008. Growth is low, and deleveraging is an ongoing process. However, the response by policymakers has been strong, and free money is leading to bubbles, the misallocation of capital and excess leverage. In this note, we lay out a framework and road map for investors to look at the rise and inevitable bursting of the bubble in global corporate bonds. The Fed and the rest of the G4 central banks have created a bubble in the corporate bond market.
Volatility in general is still falling, with both equity and commodity volatility lower than their 2005/06 trough. However, we are seeing signs of life in interest rate volatility. US rate volatility has recently pipped up, and this has been led…