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Earthquake of normality

19 Mar 2012 By Ian Campbell

Suddenly markets are shifting. The dollar is at an 11-month high against the Japanese yen. Gold has fallen by 8 percent since Feb. 28 and yields on UK gilts, German bunds and U.S 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 U.S. one, is improving. A third round of U.S. 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 U.S. 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.


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