MorningWord 6/28/13: If the market makes it out of today in one piece, then it’s safe to say that the first half of 2013 was a profitable period for those who were just long and strong U.S. equities (ex AAPL of course). With the second quarter coming to a close on tonight’s 4 o’clock bell, I think it is worth taking a look how things shook out relative to Q1.
Below is a snapshot from Bloomberg showing the primary global equity indices performance in Q1 2013:
We all remember this quite well – the U.S. and Japan led the world, while emerging markets like China and Brazil were down, and Northern Europe’s gains lagged and southern Europe was down.
Flash forward to today (assuming we don’t see any meaningful action into Europe’s close and here in the U.S.), and what is apparent is that the indices that were doing well in Q1 continued to do well in Q2, but less well, and emerging markets continued their slide, while Europe apparently stabilized a bit.
Bloomberg World Equity Index Snapshot for Q2 2013:
So where we stand now is the U.S. and Japan dominating the world, with EM banging along the bottom and Europe trying to hang on to the gains that they have.
Bloomberg World Equity Index Snapshot for 2013 YTD:
To just mention equity performance would be a tad pedestrian as there is an obvious correlation btwn bond yields that have been subdued for so long and the rise in the SPX to new all time highs.
The chart below of the yield on the 10 Year Treasury over laid with the SPX shows the 2013 lows in yields in early May preceding the push higher in the SPX in late May. All was right in the world until a fairly unused word in the English language started to be heard more and more….taper.
Enis here: The headlines have focused on the Fed’s effect on bond yields. Even Ben Bernanke said that he was surprised by the speed of the move higher in rates. But perhaps the move in Treasury yields was simply playing a bit of catch up with the move higher in stocks in the first half of 2013. The Fed’s taper talk was a catalyst to shake people out of a crowded trade.
Going forward, we’re of the opinion that the inverse relationship between bonds and stocks is more likely to re-assert itself. Bond positioning is likely cleaner than it has been all year, and we still think stocks are going to have a rocky 3rd quarter. However, we’re positioned for bonds to move higher in the short-term, with this trade structure (here).
While the return of bond vigilantes is an attractive story, the reality in our view is that deflation is still the real risk. The moves in commodities and emerging markets confirms that risk, and as a result, we view lower Treasury yields as more likely in the second half of 2013. With that, the classic risk-on / risk-off relationships (bonds up, stocks down) could be back in the 3rd quarter.