Economic Volatility Is Back

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Escalating fears and an uptick in the cases of the Delta variant of COVID around the globe is giving rise to a safe haven trade to start this week. Most everything is trading lower, with the exception of the U.S. Dollar, Treasuries and Mortgage Bonds.

Stocks are moving sharply lower. They had been looking for a reason to pullback for a couple weeks now. A strengthening dollar is good for bonds as it reduces inflation fears and supports the value of the underlying asst for investors around the globe.

The reality of today’s market response to rising COVID cases is that we must take time to see if the fears are justified. An increase in mandated masks and travel restrictions would reduce economic activity and this is what is playing out today. One thing is for sure – if these fears linger and continue to cause economic volatility, it’s tough to see the Fed talk about tapering bond purchases.

We are seeing other countries struggle with the COVID variants after fully reopening their economy. The U.K. just had their Freedom Day, so now we will see how they do in a couple of weeks. Should the cases rise, it will be more bad news which bonds like. Once again, the opposite is true.

The 10-year yield has fallen o 1.21% from Friday’s close of 1.30% and is now trading beneath it’s 200-day Moving Average – currently at 1.26%. A multiple day close beneath this level would make this ceiling of resistance – keeping yields from rising too much.