Nowhere to Hide as Dollar Posts Only Gain Amid Rout
The dollar is proving to be investors’ only haven as stocks, commodities, bonds and other currencies fall in unison for the first time since 2011.
Concern governments will curtail aid to economies pushed the MSCI All-Country World Index down 3 percent, spurred declines of 2.5 percent or more in gold, copper and crude oil, and sent bonds of all types to losses of 0.4 percent this week, according to Bank of America Merrill Lynch’s Global Broad Market Index. Currencies from Australia to Mexico slipped against the dollar.
Rallies that have lifted everything from Japanese banks to Italian government debt during a four-year global expansion are being revalued amid signs central bank stimulus through quantitative easing, or QE, is poised to slow. Global equities posted the biggest two-day retreat in 19 months after Federal Reserve Chairman Ben S. Bernanke said he may phase out stimulus and China’s cash crunch worsened.
“The old risk on/risk off trade is broken,” said Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama. “The stress in the markets as the result of the pullback in QE and concurrent higher rates is causing the unwind of many kinds of trades. The liquidation and the deleveraging forces more unwinding as asset prices decline and the dollar strengthens.”
The world’s 10 biggest equity markets slumped yesterday, according to data compiled by Bloomberg. They have fallen in sync three times in the past two months, accounting for half of the occurrences over five years.
Price fluctuations are widening as investors exit stocks, bonds and commodities at the same time. The Chicago Board Options Exchange Volatility Index, a gauge of projected market swings derived from options on the Standard & Poor’s 500 Index, jumped 23 percent yesterday to the highest level this year.
Bank of America Merrill Lynch’s MOVE Index, a gauge of Treasury volatility, and the JPMorgan Global FX Volatility Index rallied to the highest levels in 12 months.
“We are beginning to see repricing of assets given a changing view on Fed policy,” Stephen Wood, who helps manage about $152 billion as the New York-based chief market strategist for North America at Russell Investments, said by telephone. “Volatility is going to be a constant companion.”
Bernanke, speaking after a two-day meeting by the Federal Open Market Committee, said on June 19 that the Fed may begin dialing down its unprecedented bond-buying this year and end it in mid-2014 if the economy achieves the Fed’s objectives.
The central bank will cut its $85 billion in monthly bond purchases by $20 billion at the Sept. 17-18 policy meeting, according to 44 percent of economists in a Bloomberg survey.
The rout in emerging markets came as China’s seven-day repurchase rate, a gauge of interbank funding availability, rose to the highest since at least 2006. The central bank has refrained from using reverse-repos to inject funds into the interbank market since Feb. 7.
The S&P 500 (SPX) has plunged 3.9 percent since June 18 for the biggest two-day loss since November 2011. Utility and telephone companies, which offer more than 4.2 percent of their price in dividends for the highest yield among 10 S&P 500 groups, slumped 5 percent over the past two days. An S&P index of homebuilders tumbled 10 percent on concern higher interest rates may derail a housing recovery.
“What you’re seeing is panicked selling,” Jeffrey Burchell, who helps manage about C$7 billion ($6.75 billion) at Aston Hill Financial Inc., said by phone from Toronto. “When people take a step back they’ll realize this is happening because economic activity in the U.S. is favorable.” He said his firm is buying stocks this week and has added holdings to banks including Citigroup Inc. and global automakers.
Even after the declines this week, U.S. stocks are still up 11 percent this year and the VIX is 18 percent below the five-year average. Ten-year Treasury yields are 1.1 percentage points less than the average since 2003, data compiled by Bloomberg show.
IntercontinentalExchange Inc.’s Dollar Index, which tracks the currency against those of six major U.S. trading partners, has climbed 1.5 percent this week, on pace for its biggest gain since July.
Leveraged investors have sold assets, sparking “big moves” in currencies as the market saw Bernanke’s comments as more hawkish than expected, Matt Eagan, co-manager of the Loomis Sayles Bond Fund and the Strategic Alpha Fund in Boston, said in a telephone interview. Treasury 10-year note yields climbed to a 22-month high.
“It looks like the dollar could be very strong in this environment if you believe that rates are going to stay up here, if you believe the U.S. is at the vanguard in achieving economic escape velocity,” said Eagan of Loomis Sayles & Co., which oversees about $191 billion. “The jury is still out.”
Australia’s dollar has weakened 2 percent in the past week, the second-worst return among 10 major currencies tracked by Bloomberg Correlation-Weighted Indexes. New Zealand’s currency fell 1.6 percent and Norway’s krone weakened 3 percent, while the U.S. dollar rallied 2.4 percent.
Mexico’s peso lost 4.9 percent against the greenback, the most of the U.S. currency’s 16 most-traded counterparts. The currency pair is also the worst performing carry trade during that period.
Deutsche Bank AG’s G10 FX Carry Basket index fell to the lowest level since September. It gained 6.8 percent in 2012 after declining the previous two years as weak economic data in the U.S., Japan and the euro region led to speculation that central banks would keep rates low and inject money to boost growth. With those conditions waning, volatility has increased, which is negative for the carry trade because it depends on predictable interest rates across jurisdictions.
U.S. government bonds have fallen 0.8 percent this week and have declined 0.7 percent this month as of June 19, on pace for the second-straight drop, according to the Bank of America Merrill Lynch U.S. Treasury Index. Global corporate debt has fallen 0.6 percent this week including reinvested interest, a separate Bank of America Merrill Lynch index showed. High-yield bonds, rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s, have returned 0.15 percent.
The JPMorgan EMBI Global Index of developing-nation dollar bonds has slipped 1.6 percent this week, poised for the worst returns since May. Greek government bonds are the worst performers among 26 sovereign markets tracked by Bloomberg and the European Federation of Financial Analysts Societies this week, losing 2.8 percent.
Investors are pulling money from emerging markets at the fastest pace in two years as slowing economic growth and the prospect of less global stimulus sink stocks, bonds and currencies from India to Brazil.
More than $19 billion left funds investing in developing-nation assets in the three weeks to June 12, the most since 2011, according to EPFR Global. Foreign investors dumped an unprecedented $5.6 billion of Brazilian stocks and $3.4 billion of Indian bonds this month, exchange data show. The MSCI Emerging Markets Index slid 4 percent yesterday while the rupee and Turkish lira hit record lows.
The S&P GSCI Index fell the most since December 2011 yesterday as all 24 commodities tracked by the gauge declined. Gold futures tumbled to as low as $1,275.40 an ounce, the lowest level since September 2010. Crude oil for July delivery declined 2.9 percent, the most in seven months.
“For a long while, we had bonds up, stocks up, non-dollar currencies up,” Jason Brady, a fund manager who helps oversee about $89 billion at Thornburg Investment Management Inc. in Santa Fe, New Mexico, said by e-mail. “Now we have the potential lessening of global stimulus, and the potential of lower global liquidity means lower prices due to lower leverage.”
-- With assistance from Eric Lam in Toronto, Moming Zhou, Katie Brennan, Ye Xie in New York, Elizabeth Campbell in Chicago, and Michael Patterson in Hong Kong. Editors: Michael P. Regan, Lynn Thomasson
To contact the editor responsible for this story: Lynn Thomasson at email@example.com