Global equities fell on Friday and stayed weak into Monday. Asian shares were lower, and US and European futures also traded softer.
The move came as the global bond sell-off continued and oil prices rose. The Iran/Hormuz situation remained unresolved.
Energy was the only equity sector that rose, helped by higher oil. Defensive, low-volatility and value factors performed better than the wider market during the sell-off.
Materials and other commodity-linked equities also fell. Gold and silver were under pressure last week, with the sharpest moves on Friday.
Market moves suggested that the drop in equities was not driven by expectations of stronger nominal growth. Instead, pricing pointed to higher long-term bond yields linked to fiscal concerns, inflation risk and oil, rather than growth alone.
The article was produced using an AI tool and reviewed by an editor.
The current market message is driven by risk, not growth, as we see the 10-year Treasury yield pushing past 4.75% this morning. This is not about a strong economy but rather fiscal worries and oil-driven inflation, a dynamic we last saw create significant volatility in late 2023. We believe buying put options on long-duration bond ETFs, such as TLT, is a direct way to position for this trend of rising yields.
Given the broad weakness in equities, we should use derivatives to hedge or position for further downside in major indices. The VIX is now trading near 28, up significantly from its lows earlier in the year, which suggests traders are actively pricing in more risk. Buying put spreads on the S&P 500 provides a defined-risk way to capitalize on continued de-risking over the next few weeks.
Energy remains the only sector showing strength, a trend that should persist as long as geopolitical tensions keep oil prices elevated. With Brent crude holding above $110 per barrel amid the ongoing situation in the Strait of Hormuz, we think buying call options on energy ETFs like XLE is a sound strategy. This isolates the one area of the market that is directly benefiting from the current inflationary pressures.
We are seeing cyclicals like materials and industrials being sold off heavily, which is not a signal of a healthy expansion. This is reminiscent of the stagflationary fears we saw back in 2022, when rising rates punished growth-oriented sectors. A pairs trade, such as buying puts on a technology ETF like XLK while simultaneously buying calls on a defensive consumer staples ETF like XLP, could effectively exploit this widening performance gap.
The fact that traditional havens like gold and silver are also under pressure is very telling. It signals that this is not a simple rotation but a broad flight to cash as rising yields make other assets less attractive. This reinforces our view that any long equity exposure should be hedged, as the path of least resistance for the market appears to be lower.
