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Prieur Perspective: New Appetite for Risk


Investors turn to equities; commodities like oil, precious metals.


Government bonds dominated action on financial markets during the past holiday-shortened week, as angst about inflation and massive issuance propelled yields to 6-month highs in the US, Europe, and Japan.

Bonds and other safe-haven assets such as the US dollar were out of favor as signs of a bottoming of global economies, albeit tentative, emboldened investors' appetite for reflation trades like equities and commodities - including oil and precious metals.

In addition to the major stock-market indices rising for a third consecutive month, some of the other milestones achieved during the past week were the following:

  • The S&P 500 Index rose by 5.3% in May for a 3-month performance of +25.0% - the biggest 3-month gain since August 1938.

  • The Dow Jones Industrial Index advanced by 4.1% and 20.4% for May and the 3-month period respectively - its largest 3-month return since November 1998. (The last straight 3-month gain was from August to October 2007, when the Index reached its bull-market peak).

  • The US dollar declined to a 5-month low against the euro, losing 6.6% during May. The buck's decline was even more pronounced against high-yielding currencies such as the Australian dollar (-9.4%) and the New Zealand dollar (-11.3%).

  • The yield spread between 2- and 10-year Treasury Notes reached a record 275 basis points on Wednesday before narrowing to 254 basis points by the close of the week.

  • The Reuters-Jeffries CRB Index increased by 13.8% during May - its best monthly gain since 1974.

  • The Baltic Dry Index -- measuring freight rates of iron ore and bulk commodities -- climbed every day in May to post its biggest monthly advance (+95.6%) on record.

  • The price of West Texas Intermediate Crude recorded its largest monthly increase (+29.7%) since March 1999.

  • Silver surged by 26.8% for the month - its strongest performance for 22 years. (Gold bullion advanced by 10.2% during May, and platinum by 8.2%.)

Back to long-term bonds. According to the Financial Times, Mike Lenhoff, chief market strategist at Brewin Dolphin Securities, said:

"Bond markets may be telling us to expect inflation but, more importantly, I think they are telling us that policy makers the world over will succeed with their efforts to reflate the global economy.

"The trend of yields on corporate debt has been down, and that on Treasuries up, implying diminishing risk premiums - which is just what you would expect if markets are banking on recovery."

The week's performance of the major asset classes is summarized by the chart below.

The MSCI World Index (+1.7%) and the MSCI Emerging Markets Index (+6.6%) last week added to the previous week's gains to take the year-to-date returns to +5.4% and a massive +36.3% respectively.

Although the major US indices experienced declines on Monday and Wednesday, the weekly scoreboard ended in positive territory, as seen from the movements of the indices: S&P 500 Index (+3.6%, YTD +1.8%), Dow Jones Industrial Index (+2.7%, YTD -3.1%), NASDAQ Composite Index (+4.9%, YTD +12.5%) and Russell 2000 Index (+5.0%, YTD +0.4%).

No positions in stocks mentioned.
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