Closing Thoughts for the Week

This past week started out rough and it never really got better. The economic strength narrative had been preventing a noticeable pullback in equities, but war is the one thing that has shaken the confidence of investors. This may be the strongest set of risk-off conditions we’ve seen since the regional banking crisis a little more than a year ago. The one thing to watch closely for is the return of the flight to safety trade.

Investors need to contend with not only what the intermarket signals are telling them, but also the potential tail risk events that could significantly add to volatility and change conditions quickly. Japan, in my opinion, is still the canary in the coal mine. It’s getting tougher to make the argument that the Fed will cut interest rates this year. Friday’s move higher in Treasuries shows that the flight to safety trade is still very much a possibility.

If the Fed is looking for reasons to cut rates later this year, the economy sure isn’t helping. Japan seems to be having much more trouble remaining in control of interest rates, the yen and future policy. Thursday’s market action was particularly noteworthy because it reintroduced volatility and resulted in a fairly risk-off move. Tail risks appear to be getting bigger and more realistic.