This week’s Market Risk AlertTM rating declines to 2, (1 to 5 system) as both our quantitative market risk signal and U.S. Media/Tech equities drop, reducing the likelihood of a wholesale decline in risk markets. While a further 2 to 3% decline in U.S. Equity Markets is possible, we DO NOT see last week’s move as the start of a sustained or meaningful sell-off. Not Yet.
Last week’s price action was a continuation of March’s rotation out of growth into value as investors search for a leader to provide escape velocity from the destructive forces associated with the FEDs Zero interest Rate Policy (ZiRP). As discussed in our 2014 outlook, we believe the sustained and global reliance on ZiRP will continue to drive risk and opportunity for investors in 2014 and beyond.
Regional Market Risk Heat Map (below)
The chart on the following page illustrates the lack of signal strength (green/yellow) for a risk reversal across most regions despite the relatively significant sell-off in U.S. Equities. The lack of follow through from other markets (realized risk) and low incidence of x-market correlations (potential risk) across regions drove our decision to reduce our market risk alert (MRA) rating to 2 from 3. The re-steepening of the UST curve followed our expectation outlined in last week’s note on Chairwoman Yellen’s dovish comments offering some support.
Outlook: We expect the bull steepener in 2s10s to continue with U.S. equity volatility/ uncertainty continuing resulting in underperformance relative to credit, rates and commodities.