This week’s Market Risk AlertTM rating is unchanged at 3, (1 to 5 system) despite the rise from 30% to 46% (0 to 100 scale) in our quantitative signal. The rise in the quantitative signal was driven by the increase in US-based correlations across asset classes. It appears equity markets are searching for a new leader as rotations hit both industries and regions. This rotation is not constructive and we believe will only move the broader market sideways until macro fundamentals such as EPS or GDP bear out. In March alone, the S&P Index was flat, against a 5% range.
Fed induced or otherwise motivated, investors fled the US for Europe (DAX, FTSE, FTSE MIB) and Emerging Markets (see attached returns graph) in a move we best describe as short-lived outperformance (Europe) and quixotic (Emerging Markets). Therefore we stay with our outlook for a sideways U.S. equity market with a +/-3% band for the near term. Credit is worth watching as a destabilizing factor as leverage becomes more palatable to investors. If past is prologue, our system will catch the turn.
Regional Market Risk Heat Map (see full report)
Uncertainty is evident across ALL regions and markets even as risk assets remain flat to higher. U.S. outperformance took a break on both a return and risk-signal basis – unwinding last week’s gains on higher correlations.
The PIIGS in Europe remain the only unique markets from a risk signal basis as investors still trade ALL their markets as risk assets underscoring the incessant bid for risk, belief in ECB and from our standpoint, potential for unwind.
Outlook: We expect the US TSY curve to steepen, led by the front-end, and a flat to modestly higher week for risk assets.