Rudi's View | Jul 15 2021
In this week's Weekly Insights:
-Is Risk-Off The Message?
-Research To Download
By Rudi Filapek-Vandyck, Editor FNArena
Is Risk-Off The Message?
It wasn't that long ago when share markets were dominated by the view that everything old was to become new again, with economic growth and inflation on the rise fueling predictions of much higher bond yields and the swift return of 'value' stocks and cyclicals while Quality and Growth were deemed grossly overvalued, poised for a big punishment to the downside.
That's not the scenario we have seen unfolding post-March.
Throughout at times excessive volatility, the 2021 whiplash market has directed underlying momentum back towards Quality, Growth and steady defensives, severely testing the conviction and resilience of those who went all-in with the previously so popular reflation trade.
Ten-year government bond yields should have been well on their way to 2% by now but instead they fell to 1.25% in the US last week and remain well below 1.50%. As bond yields remain the primary driver behind the direction of other markets, including FX and equities, it goes without saying the non-compliance of bonds has triggered heavy debates around the world about what exactly is going on.
Below are the views and assessments of some experts who never bought into the majority view that dominated financial markets earlier in the year. Given these alternative views have proved correct to date, investors, at the very least, might want to consider their merits and validity in light of recent market moves.
David Rosenberg: Tell'm They're Dreaming!
David Rosenberg, nowadays running his own research and consultancy firm Rosenberg Research, believes today's Grand International Debate merely reflects how economists and market participants get lost in tiny details that will lose all significance in due course. Instead, Rosenberg suggests, investors should focus on the bigger picture: what is the bond market telling us?
Nothing is more liquid than US treasuries, Rosenberg points out, adding: no other security than the long bond contains all the information investors need to know about inflation, growth and fiscal policy. The issue is therefore not whether bonds are "expensive", or in a "bubble", or short term overbought/oversold, et cetera; instead investors should listen to the message the bond market is signalling.
Despite many attacking central bank policies for distorting bonds and other asset markets, Rosenberg points out recent history shows bonds continue to provide important signals for investors. This signalling was as valid early in 2021 as it is today. That should be the focus for investors, not whether bonds should be lower/higher or precisely where they are trading today.
Needless to day, the bond message has changed.