Thursday , February 27 2020
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Market recovery but expect volatility to remain

Summary:
The trading day is over in the US and the numbers look good. Equity markets have recovered smartly from last weeks nosedive, with all major US indices up about 1%. Notable for me is the fact that WTI is trading close to a barrel and the euro has trade up to over .14 as the Dollar Index has declined. The composite picture is of a market that seems more or less convinced that the Fed will now stand down. The result: Oil, measured in dollars is more expensive, as are foreign currencies. And risk assets are rallying as a result. In Treasuries, yields have risen. But the fundamental inversion remains in place. 1-year Treasuries are still trading for more than 5-year Treasuries. And the one-year is also yielding more than the two-year, which in turn is yielding more than the three-year.

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The trading day is over in the US and the numbers look good. Equity markets have recovered smartly from last weeks nosedive, with all major US indices up about 1%. Notable for me is the fact that WTI is trading close to $50 a barrel and the euro has trade up to over $1.14 as the Dollar Index has declined.

The composite picture is of a market that seems more or less convinced that the Fed will now stand down. The result: Oil, measured in dollars is more expensive, as are foreign currencies. And risk assets are rallying as a result.

In Treasuries, yields have risen. But the fundamental inversion remains in place. 1-year Treasuries are still trading for more than 5-year Treasuries. And the one-year is also yielding more than the two-year, which in turn is yielding more than the three-year. 6-month paper is trading below all longer maturities though. So the super inversion has gone. Instead we are back to the fundamental inversion in the middle of the curve. And that still says Fed policy is fundamentally hawkish. Danger lurks ahead.

I don’t think the volatility is over yet by a long shot. But, for now, markets are sending an improved outlook signal. And the near-term data remain good enough to think this expansion still has legs.

Edward Harrison
I am a former European credit markets and M&A guy who started out as a diplomat. — so I have some pretty diverse interests.

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