[MownySue]

An interesting feature of the past few months has been the relatively strong bid across all financial markets. Consider for instance that since the first part of March the S&P index has rallied 48% and over the same period, IG and HY credit have returned 19% and 43% respectively.

In commodity space the S&P GSCI total return index has increased by 32%, and less trivially, precious metals, normally on the back foot at this stage of the cycle, have yielded an impressive 11%. Benchmark bonds, which have sold off in the first part of the equity rally, have rallied in the second part. The price action since the first half of June has been particularly impressive – a rally of more than 50bp in 10-yr USTs at a time when the S&P rallies by 15%.

What is driving this co-movement? From a fundamental perspective, the answer is quite clear - a relatively cheap valuation backdrop earlier this year, coupled with decelerating core inflation and fading ‘exit fears’. From a flow perspective, the only way to rationalise the relatively strong bid across all asset classes is to assume that cash is now being put back to work. Otherwise, in an allocation shift, a rally in one asset class should be backed by a sell-off in at least one other asset class.