In The Midst Of A Bank Drama, Mixed-Up Markets Can't Get Their Story Straight

Markets seem to be telling a lot of stories these days. Divining a unified signal from them has never been more difficult than it is at the moment. It is facing a number of challenges. Treasury yields fall the most in a decade. Gold surges. Stocks stand at two-month highs.

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A ties which normally bind asset classes have come loose. During the past month, both treasuries and stocks gained. Treasury volatility continues to be well above stock volatility. The gap between the two deteriorated in March as the most severe in recent memory. The price of gold reached an all-time high on rate-cut bets, while credit traders showed that they were confident about the balance sheets of companies. In addition, the market keeps pumping money into money market funds as well.

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A muddled macro picture is playing havoc in the equities market, causing investors to rethink the health of the corporation. In March, the difference between S&P 500 sectors of the best and worst quality topped 20 percentage points, more than double its average over the past two decades. For the third month in a row, strategists have left their S&P 500 year-end forecasts unchanged, despite the fact that individual stocks are diverging, with lockstep movements lowering to 30% from 50% for most of last year. Unsure of what to make of it all, the strategists have stayed away from adjusting their forecasts to account for the year-end.

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Added to that is the near-impossibility of predicting the path of the Federal Reserve policy and the path of the economy at a time when financial stress has eased, but has yet to be resolved, making it difficult to predict the policy outcomes for the economy, inflation, and inflation.

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It looks as though markets are confused, contradictory between asset classes when it comes to pricing in the tail risk of a recession, but not as a credible imminent threat, said Peter Chatwell, head of global macro strategies trading at Mizuho International Plc. 

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Several of the US economic data releases during the past week have been below expectations, and the jobs report is due on Friday, which has reinforced arguments that a recession is imminent and the Fed will be forced to cut interest rates. A decline of the S&P 500 occurred this week as a result of that dwindling optimism among investors. The Nasdaq 100, a tech-heavy index, and speculative corners like profitless technology firms underperformed major benchmarks, including the Nasdaq 100.

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It is a Good Friday holiday on the US equity markets. The futures market will open in New York at 9:15 a.m. on the day of the holiday.

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There are still diverging paths in the long run, and despite the narrowing in some of them over the past four days, some of these paths are still diverging. As indicated by monthly implied equity correlation in the S&P 500 index, the relative value of the top five stocks in the index has tumbled, as they have delivered 161% of the past month's gains, a far higher return than the average of 41% recorded over the previous five years. 

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The dispersion among equities is likely to continue to increase even if a looming recession weighs down on equities and bolsters bonds even as a recession looms, according to Marija Veitmane, a senior multi-asset strategist at State Street Global Markets, because companies with strong balance sheets and rock-solid earnings are more likely to outperform in the long run. 

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The current financial environment could also lead some investors to increase their risk exposure as a result of these circumstances, according to JPMorgan strategist Nikolaos Panigirtzoglou. Compared to low correlations between sectors and stocks, low correlations between sector and stock returns suppress volatility in the index, causing volatility-sensitive investors to keep risk on the sidelines rather than reduce it. 

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There has been a reluctance by big money investors to chase the strong stock market performance that emerged in the first quarter, while many investors have remained defensive, which has undermined any signals emanating from the equity market. The Bank of America, quoting data from EPFR Global, reports that investors had withdrawn $5.2 billion from global equity funds last week as they deposited $60 billion of cash into money market funds as a result of their preference for yield-bearing instruments.

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According to Emmanuel Cau, head of European equity strategy at Barclays, the current state of European equity markets is low confidence, low volumes, and investors seem to be on the sidelines. As a result, I'm more concerned about the short covering than the fundamental reallocation driving the price action in equities and rates.