Silver, Gold, Havens Bid Ahead Of Critical Week For US Equities

We’ve talked quite a bit of late about bonds and stocks sending conflicting signals.

In fact, the bond/stock mixed message was in many ways the most important takeaway from last week’s euphoric bounce off the post-Brexit lows. Here’s a look at how risk performed versus yields on US, German, and Japanese government bonds:

Notice yields simply didn’t respond. In other words, safe havens were bid even as investors piled into risk. Consider the following commentary and graph from Goldman as it’s critical to understand exactly what’s going on here and the bank has done a good job of explaining it:

“The chart highlights an interesting demarcation in the behaviour of the shape of the yield curve in economies with positive policy rates (e.g., the US and the UK) versus those with negative policy rates (e.g., the Euro Area and Japan). In the former, the flattening has come from the front-end of the yield curve (maturities between 2- and 5-years) as central bank hikes are priced out. In countries with negative policy rates, instead, the market assesses that the ‘effective’ lower bound is close or has already been reached and hence any additional easing is likely to take the shape of increased asset purchases.”

(Chart: Goldman)

Basically, the market is just frontrunning central banks, it’s just showing up in different places on the curve depending on which easing levers traders think the respective monetary authorities will pull.

So that’s bonds. What about other safe havens? Well, in case you didn’t notice, silver is on an absolute tear of late and gold hasn’t been too shabby either:

Here’s a bit from Bloomberg:

“Silver touched a two-year high and gold rallied for a fourth day after the Brexit vote spurred demand for havens.”

“Silver soared as much as 7 percent, its biggest intraday gain since 2014, before paring its advance to 3.4 percent as it traded at $20.426 at 12:33 p.m. in New York. Holdings in silver-backed exchange traded funds expanded to a record last month, and assets in gold ETFs are now at the highest since August 2013 as investors bet on a continued low-yield environment.”

Meanwhile, CFTC data shows leveraged funds increased their net long yen position to the highest level since December 2011 last week.

What’s interesting there is that it’s the same combination of safe haven bids and central bank frontrunning that’s driving bonds and bullion, only the latter dynamic is reversed in this case. That is, the market anticipates more easing from the Bank of Japan, but that’s increasingly seen as yen positive.

“Given that Japan and more recently also Europe have trade surpluses and these flows tend to be sticky, they create natural pressure for the currencies to appreciate,” Deutsche Bank wrote last month, adding that “if monetary policy easing has a negative impact on prospects for growth and diminishes local risk appetite, it will reduce capital outflows and result in upward pressure on the currency.” In short: Japan is the first country to reach the outer limits of accommodative policy and now the whole thing is starting to work in reverse. It’s like a monetary distortion of space-time. Here’s Bloomberg one more time:

“What was the extreme bullish scenario among yen forecasters at the start of 2016 is now close to the base case -- and even that may turn out to be too cautious.”

“The boldest forecasts for gains underestimated the Japanese currency’s strength in the first half of 2016 by at least 10 percent. The yen exceeded all estimates as investors sought it as a haven after events that most considered unlikely came to pass -- from Britain’s decision to quit the European Union to Donald Trump’s emergence as the presumptive U.S. Republican presidential nominee.”

(Chart: Bloomberg)

The thing you have to ask yourself is this: is it realistic to think that all of these assets can go up at the same time? That is, can stocks rally as the yen soars, precious metals rise, and bond yields fall?

You certainly wouldn’t think so. Oh, and don’t forget, we’ve got a jobs number coming up on Friday.
Trade accordingly.

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