Good morning. Donald Trump went to Michigan today to reveal sculpture For the United States besieged automotive industry – just another case of the president decreasing on the prices. Call that the job of tacos (for Trump always chickens). Although tacos trade may not be enough to stabilize the prices of American assets, it certainly beats harmful policies. Send us an email: Robert.armstrong@ft.com And aiden.reiter@ft.com.
Why do shares and obligations evolve in the same direction?
During the last six days of negotiation, equity prices and bond prices have increased together. The S&P 500 is up approximately 9%; The yield in 10 years has dropped 25 base points (remember: give a drop = prices up). Nominally, this is excellent news from your average diversified portfolio: both bits earn money. But it is also slightly disturbing. The good thing about the possession of shares and obligations at the same time is that, at least part of the time, one compensates for the other. At risk at risk, accumulates; At times at risk, links. When the two are correlated on the assembly, thoughts turn to the uncomfortable possibility that they will also fall together – as they did in the miserable year 2022.
Six days do not make a market regime, but we are a little paranoid here. Why are shares and obligations positively correlated? For the context, here is a one -year organization of stock prices and bond yields, with the overturned return axis, so when these lines increase, the prices of bonds increase:
As you can see on the right, the prices of the “Liberation Day” killed actions and supported obligations at the start, but they have fallen in step since, first falling together, then rising together.
One possibility is that shares or bonds are wrong – their prices fail to correctly reduce what the future has in store for us. It may be that the monkeys at risk of lowering decrease which manage active scholarship portfolios jump to any sign of the administration tariff and ignore the economic damage that a trade war will do. Alternatively, you might say that bond investors diving unaware, once again, the risks of inflation. Treasury yields have two main components: actual interest rates and escape inflation expectations. In the recent bond rally, inflation expectations have been stable as real rates have dropped. But are not the prices inflationists?
However, a more conciliatory reading is available. It may be that the shares and obligations were injured, not by prices in particular, but by an development of unpredictable and incompetent American policies in general – something that the announcements of the “Liberation Day” personified. When the US government is getting into the foot, you sell actions because growth is in danger and you sell treasury bills because you have a second reflection on who you lend. You do the opposite when the administration brings back bad policy, as it has done recently (it is the work of tacos at work).
We leave readers to choose the theory they love or to suggest others.
Agricultural products and diversification
It is a difficult period to have the standard stuff. Stocks are volatile and the prospects are troubled; Bond yields are also everywhere; The gold is in tears, but seems too hidden. Are products (not gold) a source of stability? A hedge? A diversifier?
It is a common thought in certain corners that the goods are a good blanket of equity. This turns out to be misleading – although there are periods when the raw material index and the prices of individual raw materials take place against actions, the relationship is not very reliable:
There are simply too many products, with different relationships with growth, risk and rates, so that it is a stable one -way relationship. And the promulgation of prices – Taxes on physical imports, including raw materials – has grieved the relationship more. Since Trump's “reciprocal prices” were promulgated and retracted, the S&P 500 has a little outperformed with a wider product index, but above all followed the same model:
The wider index masks individual price movements and is strongly weighted towards energy. The breakdown of the index still gives a clearer image:
Gold race is well documented. Fears of a global slowdown, the potential for disturbed commercial flow and the potential OPEC + policy changes are behind the miserable energy performance. And American steel and aluminum prices and rare land bans in China, which are all bad for growth, seem to be holding company Lower the prices of industrial metals. This is where the easier answers end, however.
The stability of agriculture prices is more surprising – and has echoed both in the term markets and through the three agricultural sub -indices (softs such as coffee and wood, grains such as soy and wheat and livestock). This could be due to the fact that the supply should decline while farmers retreat to uncertainty. But it is also easy to imagine the opposite scenario: geopolitical rifts and slower growth remove the demand for farming products.
The agricultural products markets are diversified and behaved strangely the last time they were faced with pricing pressure in 2018. Take soy, the largest agricultural export in the United States. Before the first Trump rates series in 2018, China bought more than 60% of American soy exports. But China has exchanged American soybeans for Brazilian prices when the prices have struck; China was only 18% of American soy exports at the end of 2018. fallWhile Brazilian soy has added a bonus. Indeed, we saw this price differential reproducing after the “Liberation Day”, but it quickly disappeared:
It is possible that the dislocation of the market will reproduce this time. But, to repeat a familiar mantra, we do not know where the price policy in the world will end. The United States and / or China can descend.
This uncertainty can be what maintains the prices of agricultural raw materials and returns it in the meantime. “I think the market is waiting to see something concrete … In the current environment, the markets can be based more on the fundamentals on the individual agricultural markets,” explains Joe Janzen at the University of Illinois Urbana-Champaign. But we do not yet know what this year's harvest will look like. Oliver sighs to Blue Line Futures, a brokerage firm on raw materials and future, explains:
(It is) a single period of the year to be in a trade war against the markets, mainly for the benefit of American farmers. It is currently the planting season: the corn is planted by 25%, while the 16% soybean, for example. There is still uncertainty of what we can produce. . . With these questions looming, there is a meteorological bonus inherent in the market. If a trade war had started in the fall, things could have been much uglier.
However, this is not necessarily true for other agricultural products. The prices of coffee and chocolate are extent to the sky after bad seasons of growth. And fears of a global economic slowdown have more clearly lowered wood prices.
It is also possible that the markets are more ready to examine the impact of prices on the products than they were in 2018. While Joana Colussi at the University of Illinois Urbana-Champaign has been the subject of products, China has found agricultural and energy products which he formerly obtained in the United States (Soabaans from Argentina, Mongolia coal) and the United States. new buyersAlso. And China quickly overcome its resentment the last time – American exports from soybeans to China increased regularly after 2018, up to 52% of the total American exports last year. Traders can choose to browse commercial rifts and assume that all basic products will eventually find buyers.
There is a distinct question in the best way to contain agricultural products; The FNB of basic products and the products linked to the future are imperfect vehicles. That said, because of their complex dynamics and their interaction with prices, exposure to agricultural products should provide significant diversification. And diversity is particularly precious at the moment.
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