From Reopening Cheer to Growth Fears: Charting Markets’ Reversal

After a first half built on reopening hopes, a sudden bearish turn has replaced inflation fears with growth worries -- sharply dividing Wall Street.

Reflation trades and optimism about a V-shaped economic recovery has given way to talk of peak growth and doubt about the durability of a rebound built on the belief that the pandemic is over.

Deutsche Bank’s George Saravelos said the market is hedging for “secular stagnation 2.0,” with consumers cutting back demand. A quantitative Danske Bank model, meanwhile, painted “a clear picture of a peak in the global industrial cycle.” Nomura’s Jordan Rochester says markets are “pricing a global growth slowdown.”

To be sure, the moves may have been exaggerated by thin summer trading and could be technical as traders take some chips off the table of an ebullient rally. In a note to clients, Marko Kolanovic, the chief global market strategist at JPMorgan Chase & Co., forecast a rapid return of reflation trades such as cyclical stocks, bond yields, high beta stocks “as delta variant fears subside and inflation surprises persist.”

Yet clearly the speed and scale of Monday’s gyrations caught many off-guard. Here are five charts showing how it’s playing out across markets:

Correlations Changing

The dollar’s negative correlation with the U.S. two- and 30-year spread, a reflection of balance between rate bets and inflation expectations, is near the strongest level since March. That’s a shift from a brief positive relationship earlier in June, when a more positive global outlook kept haven demand for the dollar at bay and supported expectations for higher prices. Now, the U.S. currency is in vogue as risk sentiment falters, while 30-year Treasury yields plumbed the lowest level in more than five months.

From Reopening Cheer to Growth Fears: Charting Markets’ Reversal

Long-Term View

The compensation investors demand to hold longer-term U.S. Treasuries versus rolling over short-dated obligations, known as the term premium, has fallen to zero. Effectively bondbuyers are no longer requiring recompense to lock up their money. That partly reflects a belief that the economy won’t overheat excessively, with inflation out-of-control and eating into the real value of future bond payments.

From Reopening Cheer to Growth Fears: Charting Markets’ Reversal

Cyclical Hiccups

U.S. stocks most tied to economic growth are now languishing behind shares of companies that witness all-season demand. A strategy of going long on large-cap cyclical equities and shorting defensive stocks has fallen since the start of June, plunging to a five-month low. That has erased the valuation premium investors had accorded cyclical stocks during the post-pandemic recovery trade.

From Reopening Cheer to Growth Fears: Charting Markets’ Reversal

Sentiment Shift

Market measures of inflation are nosediving with the price of oil. Demand for crude is falling amid concern that the spread of virus variants is ruining the summer tourist season while the threat of price pressures becomes more distant.

From Reopening Cheer to Growth Fears: Charting Markets’ Reversal

Negative-Yielding Debt Pile

The total market value of negative-yielding debt worldwide climbed above $15 trillion this month for the first time since February, according to data compiled by Bloomberg. The relentless bond rally has stumped Wall Street and blindsided hedge funds, which expected Treasuries to sell off amid surging price growth in the U.S. Instead, they were wrong-footed as demand for the safety of government debt proved a more powerful force.

From Reopening Cheer to Growth Fears: Charting Markets’ Reversal

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