APAC Morning Update - 26/03/21

The AUDUSD opens at 0.7584 and the NZDUSD opens at 0.6958

The grind lower continues. We are coming into the end of the quarter, and its time like these that you can run into rebalancing flows, so you can get some fairly strong moves.

What is rebalancing you ask? Well lets say a fund needs to keep a mix of 50% equities, and 50% bonds. They don’t rebalance every day, as that would be inefficient, but every quarter they might need to be with back within pre-arranged tolerances.

So let’s say Equities have gone up 10%, and bonds have dropped in value by 10%. The portfolio would now have 55% of its value in equities, which is too aggressive for its mandate. Therefore to get back to a 50% mix, they need to sell some of those equities and buy more bonds. Estimates on US pensions alone are that they need to sell almost $90 Billion worth to get back to even, so this stuff matters.

On a much wider time scale, this answers another question. Who would buy a bond out 50 years that has a negative yield?

Well some fund manager of course, that has a mandate to allocate 20% of their $50 Billion portfolio into European debt. They are forced into buying it so they can reach their mandate, but you can hardly argue this is an efficient market using market forces to get good price discovery.

When it all hits the fan they will argue they had no choice and it was not their fault they had to buy this stuff, and actually they were beating their benchmarks by have less of a negative yield than others. Time for a bonus?

Global equity markets are mixed: Dow +0.7%, S&P 500 +0.7%, FTSE -0.6%, DAX +0.1%, CAC +0.1%, Nikkei +1.1%, Shanghai -0.1%.

Gold prices are off 0.2%, currently trading at $1,731 an ounce. WTI Crude Oil prices are off 4.5% trading at $58.5 a barrel.