U.S. one-hundred dollar bills are arranged for a photograph in Hong Kong, China. (Photographer: Xaume Olleros/Bloomberg)

JPMorgan Casts Wary Eye on `Unhelpful' Rates/Dollar Correlation

(Bloomberg) -- Higher rates along with a higher U.S. dollar could be as disruptive to global markets as the reversal of the correlation between stocks and bonds in February, according to JPMorgan Chase & Co.

Yet strategists led by John Normand don’t see this potential disruption as their base case and largely aren’t positioned for it, because they still expect a synchronized global upturn and continued U.S. political risk, they wrote in a note Friday. But they are watching developments.

“The relentless rise in U.S. 2-year rates and the recoupling of the dollar with interest rate differentials” is an “unhelpful development which has both fundamental and technical origins,” Normand and his fellow strategists said. “Global markets continue to signal more risk than opportunity this spring” despite impressive earnings, with widening credit spreads and a near-total retracement of 2018 losses by the trade-weighted dollar.

Separately, JPMorgan strategists led by Marko Kolanovic wrote Friday in a monthly asset-allocation update that they were further underweighting credit (to -7 percent from -5 percent) -- and moving to a slightly higher overweight on commodities (to 3 percent from 1 percent), mainly in oil as a hedge to geopolitical risks and due to strong demand growth. They maintain a 14 percent active weight in equities and -5 percent in both cash and bonds.

As for the rates/dollar correlation, JPMorgan sees it becoming more disruptive for global markets if:

  • U.S. growth and/or inflation accelerates without non-U.S. growth doing the same, which would add momentum to U.S. 2-year rate spreads
  • the U.S.-China and U.S.-Iran disputes are resolved unexpectedly quickly
  • or there could be a technical trigger via simple price momentum.

“We still believe in a synchronized global upturn and persistent U.S. political risk,” the strategists led by Normand wrote. “But if we are wrong, this USD/rate correlation flip could prove as disruptive as the equity/bond correlation reversal in February.”

©2018 Bloomberg L.P.

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