Lower UST yields are hardly a panacea for short trades. If the main factor driving the USD was higher UST yields, removing this key recent driver can reveal other concerns bubbling under the surface.. Put another way, explanatory factors in asset prices are dynamic, not static.
In stocks, sharply lower real yields are driving an outperformance of the more growth-heavy vs the more value-focused over the past week.
With the USD rallying against this backdrop and prices down 10.3% since the Mar. 11 highs, near-term downside risks around global growth – particularly in the Eurozone – make a convincing case for renewed USD strength even in an environment of lower global yields.
This dynamic makes more sense in the context of the underperformance of USTs relative to their G10 peers over the past week. Moving into a strong Q2 for US economic activity, business survey data suggesting prolonged supply delivery times, and a slower-than-expected recovery in the Eurozone implies further USD upside.
However, a renewed rally in commodity prices would suggest that global ex-US growth concerns are starting to turn more positive and signal opportunities to sell the USD and re-engage in the long equities value trade more purposefully. A milder-than-expected third covid-19 wave in the Eurozone could prove one such trigger. could prove one such trigger.
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