- Markets are perplexed as the Russia-Ukraine conflict destabilized the global recovery.
- The crisis in Ukraine and Russia’s ostracism are upending commodities flows and the global economic outlook, resulting in a jumble of odd relationships.
Oil has risen in tandem with Treasury bonds, while gold has risen in tandem with the currency. The former was obvious in the last 24 hours, with Brent crude rising to $113 a barrel and the US 10-year yield falling to below 1.70 percent, compared to a level of 2% before Russia invaded its neighbor.
It’s debatable how long such surprising tandem moves can last. Those who can predict when and how they will unravel will be rewarded with profitable trades.
The Gordian knot of bonds and commodities is the “big one” for IG Markets Ltd. analyst Kyle Rodda: a stampede for safe havens is smashing rates, but a commodity spike on fears of conflict-related supply interruptions threatens to exacerbate already unprecedented levels of inflation.
“At some point, something has to give,” Rodda remarked. “When markets have to price in higher inflation, I believe it’s bonds,” says the author. For the time being, this is a symptom of a jumbled market attempting to discount the unpredictability.”
The graphs below show how short-term, 20-day cross-asset correlation coefficients have changed over time, with 1 being the greatest possible reading.
Concerns about global growth have fueled refuge flows to Treasuries as oil prices have risen. However, if rising energy costs push inflation back to the forefront of market concerns, bonds might be targeted.
The dollar and gold prices usually move in opposite directions, but the recent flight to safety has boosted both assets. This raises the important question of whether gold has reached the pinnacle of its recent run.
Following the removal of some Russian banks from major global payment networks, bets on Bitcoin and other digital tokens to fill part of the void have risen. The recent strong link between Bitcoin and global stocks has been diminished as a result of this. Critics who believe the world’s largest cryptocurrency is essentially speculative may be wary of its breakout.
Disclaimer: These are the writer’s opinions and should not be considered investment advice. Readers should do their own research.