Photographer: Michael Nagle/Bloomberg

Market Reaction to Retail Sales Miss Suggest Bonds and Stocks' Fates Remain Intertwined

The positive correlation on full display.

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.

USGG10YR Index (US Generic Govt  2016-09-15 09-03-38
Source: Bloomberg

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.

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE