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So, peeps!
Another extraordinary period in the life of the markets…
This month the UK 10-year Gilts have hit prices we did not
see since late 2011, which, inversely put, means that they
are at record lows (this time, unlike 2011, they are actually
at negative yield)…
What the above chart, which I prepared on Investing.com using
an overlay of the 10-Year Gilt monthly chart (candlesticks) and of
the FTSE100 monthly chart (red line) since 2011, shows is that
the major difference in the two 10-Year Gilt highs is that the first
time it was mirrored by a FTSE100 fall from just over 6050 to just over
5100, in other words the falling Gilt yields were accompanied by a falling
FTSE100; this time round, however, the high Gilt prices are accompanied
by a rallying FTSE100, at a time when confidence in the UK financial markets is clearly at
an all-time low.
I hear you say: “Ah, but it is because of the low Pound”; or: "Ah, but it is because of the
fresh BoE stimulus". All this may be true, but it does not bode well that the previously
held dynamic of rising UK equities and rising 10-Year Gilt yields has been distorted to the
point that the two are now inverse…We should be seeing 10-Year Gilt prices falling (and their
yield rising) in a flight to safety, while the FTSE100 should be falling.
I hear you say also: "It is not the FTSE100 that reflects current Brexit blues, but rather the
FTSE250"; true, the FTSE250 has been struggling as it is more based on UK companies, while
the FTSE100 has a lot of companies based outwith the UK… However, as I posted in another
Forextown thread, the inverse relationship between Pound and FTSE100 has not been always
thus; in the last ten years, we had entire periods where both Pound and FTSE100 were rising
and falling in tandem, perfectly matching in sentiment, and at times this has indeed diverged.
We are at one such juncture, where a low Pound is proving beneficial for the FTSE100; however,
this is not set in stone, and it will inevitably change once again to a parallel, positive correlation.
Until then, we have a distortion in the relationship of the Gilts and the FTSE100, which signals to
me, along with a very low FTSE100 Vix (volatility index), that there must be some kind of response
from some unknown corner of the system that will pull the plug on capital and reallocate it out
of equities, or, that historic positioning in equities will just come to an end.
While August has been the ‘month of crashes’ in recent history, I would not be so certain, but it is
a possibility, however improbable it may seem, that equities at these highs, providing such thin returns,
are certainly stretched - and analysts have been signalling this since 2015, so it is nothing new.
When or how ‘the Big Short’ will actually materialise, it is what nobody knows.