There is no honest man — not one — that can resist the attraction of gold! — Aristophanes

Having finished February on the back foot, equity markets started March on the front foot. Asset prices across the board recovered on Monday driven by stability in bond markets. US ten-year treasuries have settled back to 1.42%, having hit 1.6% a few days ago. We noted that several Federal Reserve members are speaking this week, one of the first is Lael Brainard who confessed the Fed are playing close attention to the market developments. He tried to reassure capital markets as he expressed concerns that persistent tightening in conditions that could slow progress to our goal. A goal that must be to a return to growth in the US economy.

If the recent rout in global bond markets subsides, and a sharp move downwards in the Merrill Lynch MOVE index on Monday could suggest this is a possibility, equity markets may stage something of a support base. If bond prices can remain stable as economic growth optimism rises, equity prices could resume their rally.  As the old saying goes if my aunt had…. She would be my uncle. Equity investors will keenly watch the bond market which will in turn watch the employment data.

Studying market positioning is often helpful in helping to predict short term moves but is of little interest for the longer-term investor. At present sentiment towards equities and bonds is polar opposite. Nomura’s model shows extreme short positions across global bond markets, this should give confidence any sell off in bond markets could be limited. On the other hand, equity fund flows have been extremely strong recently, buyers to the right sellers to the left.

The big story will be the budget on Wednesday. How will Rishi Sunak balance the books? As Maximus Decimus Meridius says in the opening lines of the film Gladiator, waiting to hear if Germania will surrender, “we shall know soon enough”. There has been enough press around the dangers of supressing a recovery with taxes rises. Though he may be persuaded at this point in the recovery, we will have to prepare for more fiscal pain at some point in the future to pay for the COVID-19 policies.

One asset price that has suffered in the past few months has been gold, supposedly an asset to own during periods of inflation. The price of gold rose above 2000 dollars last year when inflation was the last thing on central banks minds. Fear for what the virus might do to the global economy drove investors back into gold. Gold is a negatively yielding asset when bonds become more attractive gold becomes less attractive.