This morning provided a great example of how confusing and complicated correlations among asset classes are in the current market.
Stocks rallied with the Standard & Poor’s 500 up 1.15% as of 11 a.m. New York time and the Dow Industrial Average ahead 1.7%.
In some markets that would have been an all-clear signal after last week’s chaos and sent a message that buying risk assets was okay again.
The Treasury market “might” have gone along with that signal. As of 11:30 a.m. New York time the yield on the 10-year rose 1 basis points as the price of Treasuries fell. That’s what you might expect if traders and investors had decided that some of last week’s danger had passed and it was no longer imperative buy safe haven assets such as Treasuries.
However, gold, the ultimate safe-haven in times of fear, climbed 0.6% to $1,355.21 an ounce, the highest in more than five weeks. That would seem to indicate, contrary to the move in stocks and in Treasuries that fear was still alive and well in the market this morning.
How do we untangle this jungle of signals?
First, by recognizing that asset classes are operating on very different time scales right now. Stocks were up, in the short-run, in a bounce from last week’s pummeling. The signal sent here quite possibly didn’t say anything about the behavior of stocks as an asset class beyond a period of a few days. The bond signal is operating in the same short time frame with a further limit–the U.S. Treasury is scheduled to auction $294 billion in notes and bills this week. That’s the biggest issuance on record. As in EVER. Gold, on the third hand, seems to be looking furthest out of the these three classes. It’s signaling that the dangers of last week haven’t gone away and that after any bounce they’ll still be there.
Second, investors and traders need to take the individual momentum of each asset class into account. Gold has a tendency to move upward right now because it’s riding a pretty strong upward streak recently. If you looked at the financial markets for an asset with good momentum and a good chance to move higher–without any consideration of macro economics–you’re be likely to come up with gold.
Third, most risk reward thinking right now is very short term after last week’s drop in stocks. Nobody know what news with next news cycle will bring so there’s an understandable tendency to go for the fast in and out trade–like a bounce after last week–or to ride any discernible momentum.