Is risk-on sentiment starting to revive?
All of our portfolio strategy benchmarks rose this week
Markets appear to be testing risk-on trading anew. The wisdom of the shift, assuming that’s what it is, remains highly uncertain, given the still-sky-high risk linked to the ongoing war in Ukraine and the potential for extended macroeconomic blowback in the weeks and months ahead. For details on the metrics in the table below, see this summary.
Ill-advised or not, US equities extended a cautious push higher this week, based on trading through Friday’s close (Mar. 25). Vanguard Total US Stocks market rose for a second week, gaining 1.6%. A solid performance when you consider that war continues to rage in Ukraine and the threat of a wider conflict and deeper blowback still lurks.
To be fair, news reports on Friday offered a fresh hint that the worst of the war may have peaked, based on comments from a top Russian general. “The main tasks of the first stage of the [Ukraine war] operation have been completed,” advised the first deputy chief of Russia's General Staff.
That’s a thin reed for expecting anything close to peace breaking out soon. Indeed, the war rages on. But some analysts think the official’s comments may signal a shift for Russia as it factors in that its military operation has stalled, at least relative to early expectations for victorious blitz when the war began a month ago.
In any case, weekly gains for global equity markets are conspicous this week. The top performer for our 16-fund global opportunity set: shares in Latin America. The iShares Latin America 40 ETF (ILF) extended its red-hot run of late, surging 6.8%. The fund is nearing its previous high. If it takes out that top in days ahead, the odds rise for another leg higher at some point in the near term.
One corner of equities that retreated this week: European stocks. Vanguard FTSE Europe (VGK) edged down 0.9% after two straight weeks of gains. Given the ongoing war on Europe’s eastern border, and the rising costs related to painfully high dependence on Russian energy and the increasing flow of refugees from Ukraine to Poland and other countries on the Continent, it’s no surprise that VGK may be having second thoughts about joining a rally in shares elsewhere in the world.
Commodities returned to form with a solid 5.5% weekly gain, breaking a two-week slide. Supply fears continue to animate traders in this space, supported by growing concerns that the recent runup in inflation will run hotter for longer than recently expected.
The big loser this week: US government securities. Indeed, iShares 7-10 Year Treasury Bond (IEF) was hammered, losing 2.7%, which extended a long-running decline.
The relentless rise in interest rates continues to take a toll on fixed income. The 10-year Treasury yield rose for a third week, gapping up to 2.48%, the highest in nearly three years. Inflation concerns have the market by the throat. As the bond market comes to grip with the fact that the Federal Reserve is far behind the curve in terms of raising interest rates to deal with surging inflation, the crowd is rapidly adjusting to the new world order on the horizon for fixed income.
Our strategy benchmarks continued to rebound this week. Gains are only display across the board, ranging from a fractional increase in Global Beta 16 (G.B16) to the strong increase for the global, equal-weighted mix of the major asset classes via Global Beta 5 EW (G.B5.ew). For details on the benchmark designs, see this summary.
It’s too early to say if there’s more than noise in the past two weeks of gains for the strategy benchmarks. As with so much else in macro and financial analytics these days, it’s all about the war in Ukraine.
As noted above, Russia’s announcement earlier today that it’s refocusing its military efforts on eastern Ukraine suggests that the Kremlin’s war has peaked. Whether that translates into an extended rally for assets is an open debate for now. But for the first time since the invasion started a month ago, there’s a hint that a pullback in the hostilities may be near. It could be another false dawn, but it appears that Ukraine’s strong defense of its country has forced Russia to back down, if only on the margins. ■