The past month has seen a flurry of dramatic correlation shifts and changes across key US and global assets - traditionally an indication that a major market transition is upon us - with the most notable move being the sudden positive correlation spike between the USD and US Treasury yields, as rate differentials mysteriously recoupled after a year of forcing FX strategists to goalseek tortured explanations why surging US yields failed to push the dollar higher.
All that changed recently, but what is most interesting and what has gotten relatively little discussion, is what was the catalyst that unleashed this positive correlation between the USD and rates, one which as JPM said over the weekend, "could be as disruptive to global markets as the reversal of the correlation between stocks and bonds in February."
For the answer, look to Beijing, because it was here that something unexpectedly snapped mid-way through April. For those who may have forgotten what it was, here is a reminder from Bank of America:
April 17th Chinese surprised with an easing of monetary policy; this was the trigger for US dollar strength
And not only dollar strength, but bond weakness too: because it was almost as if a switch was flipped in the middle of the ongoing escalating Trade War with Trump, when Beijing suddenly decided to send a message, how easy it is to not only send the dollar soaring, but also unleash havoc among US risk assets and dump 10Y TSYs.
In any event, China's dovish capitulation, prompted a global echo and in the past 2 weeks, hawkish central banks including the BoE, BoC, Riksbank, and even the ECB, all turned dovish; this left the Fed (and the central bank of Argentina, of course, which hiked rates by 12.75% in just 5 days although we can ignore that for now) as the long hawk, a clear US dollar positive, and more importantly, EM FX negative, something we will touch on momentarily.
Meanwhile, as the dollars surged, so did Treasury yields, and just over a week after the start of Chinese easing, US 10Y Yields spiked, briefly rising above 3.00%, a level which it turns out, is now considered the "magic number" on Wall Street, above which risk assets start to crumble.
Here, once again, is Bank of America, which reminds us that in the latest Fund Manage Survey, respondents said that 3.5% is the level they will shift from equities to bonds, down from 3.6% a month earlier. So, as BofA's Michael Hartnett notes, "it should not be a surprise if reallocation starts before yields get to 3.5%. Indeed, as we breached 3% the following asset classes all suggested that the 3-3.5% range would become “painful” if not accompanied by much stronger economic data."
Case in point, banks, homebuilding stocks, US dollar, EM, yield curve all...