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SUDDENLY markets are shifting. The dollar is at an 11-month
high against the Japanese yen. Gold has fallen by 8% since February 28 and
yields on UK gilts, German bunds and US Treasuries have risen sharply as
expensive safe havens wobble. Global equities are up, but pensive.
All this is driven by something fundamentally good. The
world economy, and the US one, is improving. A third round of US quantitative
easing looks less likely. But a touch of normality threatens to shake the
soaring edifice of safe haven bonds, scattering fallout across global forex,
commodity and equity markets.
A semblance of normality is threatening because it breaks
trends sustained over years and stretched to extremes: UK gilts are paying the
least in three centuries, Treasuries have advanced for three decades.
Policy for exceptional crisis has brought something for
everyone. QE pushed safe haven yields low in order to make money cheap for
investment in riskier things – like equities and foreign currency assets.
The dollar thereby became a funding currency for much else.
The index of the dollar's value against a basket of currencies peaked at about
120 in 2001 and has recorded lows in the 70s since 2008. This favoured gold,
the alternative metal currency. And as commodities are priced in dollars, they
too were favoured by dollar weakness.
But the dollar is rallying as Treasury yields push up. The
dollar index has gone up, although it is still only at 80. The threat for
inflated global commodity markets is that it keeps going higher. Commodities
and gold could react very negatively.
That would be a good thing. If global economic recovery is
to continue – justifying the fall in safe haven bonds – oil needs to get
cheaper.
A bond correction ought not to be bad for global equities, but
they too have benefited from cheap money and could suffer substantial initial
damage if the shake-down in bonds is violent. Nor would policymakers themselves
observe rising safe haven yields with equanimity. Rising yields imply more
expensive mortgages that could harm recovery in US housing.
A big shake-up is coming. Safe haven bonds have to fall and
their toppling will have big impacts. The first tremors are being felt.
- Reuters
*Ian Campbell is a Reuters Breakingviews columnist. The opinions expressed are his own.
