Market Reaction to Retail Sales Miss Suggest Bonds and Stocks' Fates Remain Intertwined
In the wake of a slew of broadly disappointing U.S. data, punctuated by a miss on retail sales for August with a negative revision to July's reading, S&P 500 futures fell on Thursday — but bond yields moved higher as prices on government debt also fell.
The oddity of stocks falling in tandem with bonds is difficult to explain, because government bonds are typically where investors seek safety, whereas stocks are well-bid when risk appetite is healthy. Perhaps traders were placing more emphasis on initial jobless claims and the Philly Fed — both of which exceeded expectations, or keyed in on an uptick in healthcare inflation in the producer price index.
Otherwise, it appears the defining theme of markets in 2016 — the rising, positive correlation between stock and bond prices that caused particular pain on Friday — remains firmly entrenched.
Strategists at Bank of America Merrill Lynch said Friday's tumult would likely lead to selling by risk parity portfolios and other so-called systematic strategies, which typically rely on an inverse correlation between sovereign debt and equities, of roughly $50 billion.