The stock/bond correlation signal

Good day. Donald Trump went to Michigan today to present new carving For the besieged automotive industry of the United States, only one more instance of the president goes back in tariffs. Call it the taco trade (for Trump he always leaves the chickens). While the taco trade may not be enough to stabilize the prices of the assets of the United States, surely surpass harmful policies. Send us an email: Robert.armstrong@ft.com and aiden.reiter@ft.com.

Why are actions and bonds move in the same direction?

During the last six days of negotiation, bond prices and prices have increased together. The S&P 500 rises 9 percent more or less; The 10 -year yield has fallen into 25 basic points (remember: SCURKS TO LOW = PRICES UP). Nominally, this is great news of its average diversified portfolio: both bits are making money. But it is also slightly sinister. The good thing about possessing actions and bonds at the same time is that, at least sometimes, the other compensates for the other. In moments of risk, stocks; At times of risk, they join. When the two are correlated along the way, thoughts resort to the possibility that they also fall together, as they did in the miserable year 2022.

Six days does not make a market regime, but we are a little paranoid here. Why do actions and bonds positively correlate? For the context, here is a one -year table of prices of bond actions and yields, with the performance axis turned, so when these lines increase, bond prices are increasing:

As you can see on the right, the “Liberation Day” tariffs killed the stocks and supported the bonds at the beginning, but they have fallen in step since, they first fell together, then rose.

One possibility is that actions or bonds are wrong: their prices cannot properly rule out what the future holds. It could be that the risk purchase risk monkeys that manage active shares wallets are jumping before any administration tariff sign and ignoring the economic damage that a commercial war will make. Alternatively, I could argue that progress bond investors, once again, are recklessly ignoring the risks of inflation. Treasury yields have two main components: real interest rates and equilibrium inflation expectations. In the recent bond rally, inflation expectations have been stable as real rates have fallen. But are not inflation tariffs?

However, there is a more conciliatory reading available. It could be that both the actions and the ties are injured, not by tariffs in particular, but by the formulation of unpredictable and inept American policies in general, something that the ads of the “day of liberation” personify. When the US government is triggered in the foot, it sells actions because growth is at risk and sells treasure bonds because it has doubts about who is lending it. You do the opposite when the administration returns to the bad policy, as it has been doing lately (that is the taco trade at work).

We let readers choose what theory they like, or suggest others.

Agricultural products and diversification

It is difficult to own the standard things. The actions are volatile and the perspective is cloudy; Bond yields are also everywhere; Gold is in a tear, but looks sovereign. Are the products (not gold) a source of stability? A hedge? A diversifier?

It is common to think of some corners that basic products are good capital coverage. That turns out to be misleading: although there are periods in which the wider basic products index and the individual prices of basic products move against actions, the relationship is not reliable:

There are too many merchandise, with different relationships with growth, risk and rates, so that this is a stable unidirectional relationship. And the promulgation of tariffs, taxes on physical imports, including goods, has further confused the relationship. Since Trump’s “reciprocal tariffs” were promulgated and retired, the S&P 500 has exceeded the wider basic index, but the same pattern have followed:

The widest index hides the individual price moves and is very heavy towards energy. Breaking the downward index gives a clearer image:

Gold’s Run is well documented. Fears of a global deceleration, the potential of interrupted commercial flows and the potential policy of the OPEC+ changes They are behind the miserable energy performance. And the steel and aluminum rates of the United States and the prohibitions of rare earths of China, all of which are bad for growth, seem to be tenure Below the prices of industrial metals. However, that is where the easiest answers end.

The stability of agriculture prices is more surprising, and echoed both futures and three agricultural subscripts (soft such as coffee and wood, grains such as soybeans and wheat and cattle). This could be due to the fact that the supply is expected to decrease as farmers go back to uncertainty. But it is also easy to imagine the opposite scenario: geopolitical cracks and slower growth suppress the demand for cultivation goods.

The agricultural products markets are diverse and they behaved strangely the last time they faced the tariff pressure, in 2018. Take soybeans, the largest agricultural export in the United States. Before the first round of Trump rates in 2018, China bought more than 60 percent of US soybeans exports. But China changed soybeans from the United States to Brazilians when tariffs arrived; China was only 18 percent of American soybean exports at the end of 2018. US and global soybean prices shrunkenwhile the Brazilian soy added a cousin. In fact, we saw that this price differential took place again after “Liberation Day”, but quickly disappeared:

It is possible that market dislocation is repeated this time. But, to repeat a familiar mantra, we do not know where the world rate policy will end. The United States and/or China can go down.

That uncertainty can be what maintains the prices of agricultural products and returns meanwhile. “I think the market is waiting to see something concrete … In the current environment, markets can depend more on the foundations in individual agricultural markets,” says Joe Janzen at the University of Illinois Urbano-Champaign. But we still don’t know how this year’s harvest will look. Oliver Sloup on Blue Line Futures, a brokerage firm of products and futures, explains:

[This is] A unique time of the year to be in a commercial war for markets, mainly for the benefit of American farmers. It is currently the planting season: corn is planted 25 percent, while the soy of 16 percent planted, for example. There is still uncertainty of what we can produce. . . With those questions that are coming, there is an inherent climatic premium in the market. If a commercial war had launched in autumn, things could have been much more ugly.

However, that is not necessarily true for other agricultural products. Coffee and chocolate prices are high after bad growth seasons. And the fears of a global economic deceleration have reduced wood prices more clearly.

It is also possible that the markets are smarter to review the impact of tariffs on basic products that in 2018. As Joana Colussi pointed out of the University of Illinois Urbano-Champaign, China, China discovered that the new producers of agricultural and energy products were obtained from the United States (soybeans of Argentina, Mongolia coal), and the United States has found that the US UU. They have found that the United States has found the United States. of the United States (soyabeans of Argentina, Mongolia coal) and the USA. New buyersalso. And China rapidly exceeded its last time: US soybeans exports. Uu. China constantly increased after 2018, to 52 percent of total exports from the United States last year. Merchants can choose to look through commercial cracks and assume that all basic products will eventually find buyers.

There is a separate issue of the best way to maintain agricultural products; The ETF of basic products and the products linked to the future are imperfect vehicles. That said, due to its complex dynamic and interaction with tariffs, exposure to agricultural products should provide significant diversification. And diversity is particularly valuable at this time.

(I reiterate)

A good reading

A feeling of sinking.