There’s been a ‘key shift’ in the way stocks, bonds and other assets react to growth risks

Buying U.S. Treasurys and shorting commodities became the most effective way to hedge against macroeconomic risks over the past year — and that should continue if worries mount over the spread of China’s coronavirus, according to one market watcher.

“Over the last 12 months, experience from usual hedges has been significantly nuanced — a short positioning in stock futures (or credit-spread wideners) has been much less rewarding than a short positioning in oil, industrial commodities or a long position in Treasury futures,” said Gaurav Saroliya, director of macro strategy at Oxford Economics, in a Friday note.

Read: ‘Godfather’ of technical analysis says stock-market downturn is going to get worse^[1]

In fact, that reflects a “key shift” in the way various asset classes have priced risks to growth, he said, pointing to the chart below. Over the last six months or so, oil and Treasurys have become far more sensitive to growth risks, while equities are much less sensitive....

The response to the China virus outbreak has largely followed the recent script, Saroliya noted, with copper and oil prices and Treasury yields, which fall as Treasury prices rise, all down sharply as investors “practically [take] out all expectations of an industrial recovery that we have seen since Q4 last year.” Key Words: Coronavirus will ‘shake markets out of their buy-the-dip’ mentality, says El-Erian^[2] At the same time, the drawdown in global equities has been relatively modest, he said. And that isn’t down solely to the resilience of the U.S. market, he emphasized, noting that both oil and copper have sharply underperformed the MSCI Emerging Market stock index, an index tracked by the iShares MSCI Emerging Markets ETF EEM, +1.09%^[3], the part of the global equities market most sensitive to the China viral outbreak. See: Why the coronavirus ‘poses a more significant threat’ to markets, economy than past epidemics^[4] EEM fell more than 6% in January. Brent crude futures BRN00, -2.88%^[5], the global benchmark, fell nearly 12% in January, while copper futures HG00, -0.28%^[6]  dropped nealry 10%.U.S. stocks tumbled Friday, with the Dow Jones Industrial Average DJIA, +0.54%^[7]  shedding 600 points, with the blue-chip gauge turning lower by 1% in January and the S&P 500