WHEN both bonds and equities sell off, something interesting is going on. At the time of writing, the DAX in Frankfurt is down more than 2% and the Nasdaq and S&P 500 off around 1%. Meanwhile the 10-year Treasury bond yield is around 2.3% and the equivalent German yield is 0.68%; recently the latter seemed to be heading for zero. It can't be that economic conditions are deteriorating; that would be good for bonds. And it can't be because conditions are improving; that would normally be good for equities. An unexpected hike in interest rates by the Federal Reserve might explain a dual shift but the last Fed statement hardly suggested the US central bank was in a hurry.
The alternative explanations get quite convoluted, but fairly represent the complex world in which financial traders use a combination of leverage, hedges and diversified positions. When a lot of traders are making the same bet, this drives prices in a certain direction but if the bet turns sour, then prices fall just as fast. So the 2015 consensus bet seems to have been long dollar, short euro, long core European government bonds, long eurozone equities and long Chinese equities. All those bets turned sour in short order. That makes it hard to say which individual trading position was the most important....Continue reading
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