Scary Stories Lead to Happy Ending as Stocks, Bonds Gain

Despite a lot of scary headlines, the worst place to be in the second quarter was on the sidelines.

Stocks and bonds rallied in both emerging and developed markets in the past three months and commodities gained as volatility performed a vanishing act in markets. Meanwhile, the dollar weakened against most major peers in the quarter.

The scary headlines, in fact, had a lot to do with all the price moves. Sectarian violence in Iraq and tensions between Russia and Ukraine pushed Brent oil up almost 6 percent and West Texas Intermediate crude climbed almost 4 percent to a nine-month high above $107 a barrel. Energy companies surged 11 percent as a group to lead the Standard & Poor’s 500 Index to a sixth straight quarterly gain, its longest rally since 1998.

Oil-producing nations posted some of the biggest gains in stock markets around the globe, with Norway’s OBX Index rising 10 percent and benchmark equity gauges in Russia, Canada and Brazil jumping more than 5 percent.

The MSCI Emerging Markets Index added 5.6 percent in the quarter for its biggest gain in almost two years while the MSCI World Index of developed nations rose 4 percent for a fourth straight quarterly advance, its longest rally since 2010. South Korea’s won led developing-nation currencies up 0.8 percent in the three months, the first quarterly gain since the end of 2012, while the Bloomberg Dollar Spot Index lost 1.1 percent.

Commodity Gains

The S&P GSCI Total Return Index of commodities increased 3 percent in the quarter as gasoline, silver and aluminum surged almost 6 percent. The gains in energy and metals overshadowed declines of more than 12 percent in corn, wheat and cotton.

You’d never know it from the moves in stocks and commodities, but there were scary economic headlines, too. The U.S. economy shrank at a 2.9 percent annualized rate in the first quarter, more than forecast and the worst reading in five years. While equity investors appeared willing to chalk it up to a brutal winter and look forward to forecasts of growth in the rest of the year, bond buyers markets appeared more cautious.

The Bloomberg U.S. Treasury Bond Index has climbed 1.5 percent so far in the quarter and has risen 3.2 percent in 2014 after declining 3.4 percent last year. The Bloomberg Global Developed Sovereign Bond Index rallied 2 percent since the end of March.

‘Bumpy Exit’

As the U.S. Federal Reserve continued to unwind the asset-purchase program that fueled the five-year rally in stocks, support from the European Central Bank sent bond yields to record lows in nations such as Italy and Spain during June. The ECB cut its benchmark interest rate to a record low of 0.15 percent, reduced its deposit rate below zero and introduced targeted loans to help revive growth.

That leads us to one more scary headline, which hit before the last trading session of the quarter: It will be difficult for central banks to ensure a “smooth normalization” as they exit emergency policy measures, the Bank for International Settlements said.

“The prospects for a bumpy exit together with other factors suggest that the predominant risk is that central banks will find themselves behind the curve, exiting too late or too slowly,” the BIS, which counts 60 central banks as members, said in its annual report released yesterday.

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