Riskonandfeedbackloops

In the elementary chemistry, the kind which we read in standard 11 and 12, students study one interesting molecular structure of Cyclohexatriene, popularly also known as Benzene. Researchers for a long time knew that it is a combination of hydrogen and carbon bonds but how are were arranged was a mystery. That was until the 19^th century, when a chemical scientist August Kekule saw a snake biting its tail in his dream and came up with a perfect hexagon spiced up with alternate C and H bonds. The snake and the tail allegory has also been invoked in financial literature while describing feedback loops. In the current scenario, when the markets are in a tearing hurry to go up amid the risk on mood, it is difficult to tell what is feeding on what (what is snake and what is the tail). Is the market going up supporting the risk on mood or is the risk on pushing the market up. Difficult to tell.

Leaving the causal discussion aside, optimism is in full swing. The Dollar Index is down, the Euro and sterling have made good gains, the safe haven harbinger Japanese Yen is down, stocks are up, emerging market currencies are trading strong. Japan’s Nikkei is trading at the highest level since February whereas the Chinese stocks are also clocking 12 week highs.

We had written previously that there is a complete alphabet soup which could define how the post Covid recovery might look like, but given the current markets, it looks like the bets are firmly placed on a V-shaped recovery. The market is also betting that the stimulus will keep coming as central banks, including the Fed, ECB or BOJ, will keep devising new plans to stimulate their economies. It is amusing to note that the underlying conditions which had resulted in the great fall have not yet dissipated. The news of social unrest in the US, new cases of infection, no vaccine in sight, risk of a second wave and cracks in the Sino US deal have all been side-lined for now.

In India too,  the rupee opened at 75.04 and is now trading at 75.25, which is quite strong relative to its performance of late. The Nifty is trading close to the 10000 mark with a significant rebound. Seeing that is was around 9000 on 26^th May, just last week, it has seen a heady rise. The 10 year benchmark bond index trades at 6.01.

Brent Crude trades at 40$/bbl and gold trades at 1728 $/oz. The 10 year UST trades at 0.70. One small interesting bit here is that the US treasury yield curve has steepened which shows at least some realisation that all the stimulus announced now has to be accounted for by issuing more debt in the future. The 30 year treasury yields rose to 1.53%, its highest since mid-March. The yield gap between the 5 and 30 year treasury is trading at the highest since 2017.