I am a man of routine. I get up at the same time every weekday morning and hit the exercise bike. I turn on Bloomberg TV while I ride to catch up on the financial news and find out what stock, bond, oil, and gold futures are doing. On Thursday morning, I awoke to huge gains in almost all futures markets—stocks, bonds, oil, and gold. The only thing that was moving lower that I track was the dollar.
Jonathon Ferro, the Bloomberg host, called it the “Everything rally.” I liked that name, so I ran with it.
It really was an interesting phenomenon. S&P futures were up just over 1%, 10-year notes were up over 2%, gold futures were up over 1.5%, and oil futures were up almost 4%. There were a number of factors involved in producing these moves.
Stocks and bonds were up because of the more dovish stance from the Fed at the meeting on Wednesday as it seems a cut in July is almost certain at this point. The Fed removed almost all references to being patient. This was also leading to the decline in the dollar—lower interest rates usually cause the currency of the country to fall against other currencies.
The fall in the dollar was also likely part of the reason oil and gold were climbing since trading in the commodities is denominated in dollars. The bigger influence on the two commodities was the news that Iran had shot down a U.S. military drone. That caused a huge spike in oil prices as tensions in the Middle East continue to increase. Gold got a boost on this news as well. When geopolitical tensions rise, gold tends to get a boost as investors seek safety.
The jump in gold has the commodity approaching the $1400 level and that is a price it hasn’t traded above since September 2013. If it reaches the $1400 mark, it would mean a 20% jump in the price since last August.
Oil had been moving higher from late December through mid-April, climbing from under $45 a barrel to over $56 a barrel. This marks a jump of over 25%.
Looking at the 10-year treasury, the price has jumped from around $117.60 to over $128. From a percentage standpoint we are talking about a much smaller move than what we have seen from oil, gold, and stocks. However, from a historical standpoint, this is one of the biggest bond rallies in history.
Finally, we see the chart of the S&P. From the Christmas Eve low through mid-day on Thursday, the index had gained over 25% and it was at a new all-time intraday high.
The current scenario with everything rallying is perplexing, especially with the backdrop of a global economic slowdown being the primary driver behind more dovish monetary policies from central banks all over the world. You also have the ongoing trade war between the U.S. and China and potential disputes with Europe and Japan looming.
By most measures, the U.S. economy is performing better than in most countries, but the Fed’s change in its stance seems to stem from the uncertainty surrounding global trade. While President Trump has been pressuring the Fed to ease up on rates, the Fed has been reluctant to do so while the economy is on solid footing. By refusing to settle the trade war with China, President Trump appears to have forced the Fed’s hand. Given this scenario, I don’t think we see much progress in the trade talks next week at the G20 meeting. Should the two parties meet and miraculously come to an agreement, the pressure would be off the Fed and they might not cut at the July meeting.
With the majority of analysts and economists expecting more economic trouble in the next year and a half, it seems like an odd backdrop for everything to be rallying so sharply. Even if the trade war gets settled, even if the central banks continue cutting rates—that doesn’t mean we won’t see a global recession.