A Global Convergence of Economic Conditions Is Driving the Market Melt-UpBy
Co-movements across debt markets around the world at record
Dollar tumble, soaring assets driven by synchronous output
There’s a simple way to make sense of the tumbling dollar, the Treasury selloff and the emerging-market boom, all springing in lockstep. Investors are intensifying their bets on synchronized global growth, a dynamic that’s crimping demand for safe assets and fueling convergence trades.
Consider this: Anchored by a stable business cycle, emerging-market and U.S. debt markets are more correlated than ever, Bloomberg data show. That’s hardly surprising to Gabriel Sterne, chief macro strategist at Oxford Economics Ltd. From growth to inflation to fiscal balances, economies danced to a similar beat in 2017, a rare feat in postwar history. That dynamic is now juicing risk appetite this year due to lagged effects.
“The collapse in global output volatility to 60-year lows is providing a further boost to economic activity and equities,” Sterne said. “So we think 2018 is the year of melt-up rather than melt-down.”
Swings in economic data spur higher volatility as the present value of future cash flows gets discounted the more uncertain the outlook for inflation and growth becomes. In turn, stable economic readings tend to juice global output with a one- to two-year lag, according to the London-based consultancy.
Investors appear to agree. American corporate bond spreads are at 2007 lows, 10-year U.S. Treasuries are at levels last notched in summer 2014, and developing-country stock, currency and credit markets are on a tear. The MSCI EM Index is headed for a seventh week of gains, the longest streak in five years. The Bloomberg Dollar Spot Index is at the lowest in more than three years.
In sum, the real economy is putting a floor on financial volatility, Sterne concludes, supporting previous Wall Street research. And that’s pumping up overseas currency and credit markets, a blow for the greenback.
“We are strong supporters of convergence trades, the most glaring of which arises from the yield advantage of emerging markets over advanced economies,” he said.
— With assistance by Luke Kawa