Saturday, June 14, 2008

March's Intermarket Transitions

March represented an important low in the major stock market averages, but it also was the occasion for several transitions in intermarket themes. With Fed easing, two-year Treasury yields fell much more rapidly than ten-year yields (top chart), but this changed in March. Now, with traders and investors anticipating Fed tightening due to inflation concerns and the need to support the dollar, two-year yields have been rising more rapidly than ten-year yields.

Concomitantly, we saw a massive rally in gold and a dramatic fall of the dollar going into March (bottom chart), but since then there's been a bounce in the dollar and a retracement in gold. The shift toward firmer yields has modestly supported the dollar, reducing gold's luster as a currency substitute.

March represented the start of a potentially important shift in monetary policy. That promises to continue to impact a number of asset classes, including--as we've seen lately--stocks, which view rising rates with some apprehension, given current economic weakness and continued weakness in the housing market.