Opposing Market Signals

Global equities are near their cyclical highs, but several safe-haven assets are rallying.

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Three safe-haven assets have been undergoing a recovery since mid-December: gold, the Japanese yen and 10-year U.S. Treasuries. Gold has retraced all of its post-U.S. election decline. USD/JPY has given back about 62% of its rally following the election, while the10-year Treasury yield has retraced 50% of its advance. In relation to these trends, the equity market is the so-called “odd man out”.

BCA’s cyclical view of global risk assets remains bullish, but a variety of asset prices are indicating a subtle shift towards risk aversion. This could be due to geopolitical worries and/or a downgrading in growth expectations. Whatever the reason, a continuation of these trends could signal a broader retrenchment in global risk assets. We would view this as a long overdue technical setback from overbought levels. Any such correction would represent a buying opportunity on a 9-12 month cyclical investment horizon.

A Warning Sign For EM Equities

A relapse in industrial metals versus lumber prices is a poor omen for EM equities.

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The ratio of industrial metals to U.S. lumber prices has had a reasonably good track record in gauging relative performance of EM versus U.S. share prices. Industrial metals prices are a proxy for economic growth in China/EM, while U.S. lumber prices are indicative of America’s business cycle. Industrial metals prices (the LMEX index) have lately underperformed U.S. lumber prices, pointing to renewed EM underperformance versus the S&P 500.