WHAT A DIFFERENCE A WEEK MAKES … OR DOES IT?
We were away from the markets last week. Some would say that we ran away from it, and who are we to argue. Upon returning, we were certainly in the midst of an impressive risk rally that saw stocks climb between 4% and 8% globally, while the frustrating weakness in oil was halted (at least temporarily), bouncing back from the mid $20 range back into the $31 territory. The much maligned high yield sector also showed signs of life, recapturing 40 bps from both an absolute yield and spread perspective. Credit in general also improved, with IG spreads compressing 10 basis points into the +210 range, its largest positive move in over 3 years. Yet another central bank promise to do whatever it takes was largely credited for the strong move into risk assets, this time with ECB President Draghi once again committing to act without hesitation to reverse any downward risk to price stability. Of course, the market interpreted this as more QE and/or further cuts to the already negative rate structure facing the core EGB bond market. As a result, we saw further compression in DM yields around the world, with 10 y JGBs falling to -6 bps, Bunds declining to +13 bps as all DM IG sovereign yields, including Spain and Italy now trading below comparable treasuries. In our neck of the woods, the risk rally has not reduced the demand for treasuries, with the 10y trading in the 1.7% range, down 19 bps in February and 2 bps since President Draghi’s latest pronouncements. One of the likely desired outcomes for the central banks is a cheaper currency, which has occurred over the past week as the DXY is 1.5% stronger, while the Euro is 2.1% weaker. Interestingly, the Yen is 1.4% stronger over the past week, and almost 8% better in 2016, which may elicit a BOJ response in the same vein as the ECB’s proclamations.