Macro Extremes (week ending August 20, 2021)

The following assets (on a weekly timeframe) registered an Overbought reading or traded more than 2.5 standard deviations above its rolling mean.

Extremes “above” the Mean (at least 2.5 standard deviations)

Cocoa

Italy’s MIB equity index

the US 10 year minus Australia 10 year bond yield spread

Overbought (RSI > 70)

Hot Rolled Coil Steel (for the 47th consecutive week)

Switzerland’s SMI equity index (for the 11th week)

the Nasdaq 100 index

Amsterdam’s AEX index

India’s NIFTY 50 equity index

the Copenhagen 25 equity index

The Overbought Quinella – Both Overbought and Traded at > 2.5 standard deviations above the weekly mean)

cryptocurrency Cardano

Assets (securities) within my immediate universe which touched the other side of the extreme, being Oversold (where the RSI is < 30) or were at least 2.5 standard deviations below its mean are;

Extremes “below” the Mean (at least 2.5 standard deviations)

AUD/JPY – a stronger Yen was telling us the market was ‘risk-off’

AUD/EUR – a rising Euro prompts converting it back to AUD

NZD/USD – the Kiwi fell 3% against the USD for the week

CAD/USD – continuing the trend of commodity currencies weakening against the USD

KRW/USD – a fall in an export sensitive currency, being the Korean Won

China’s CSI 300 equity index

the Hang Seng equity index 

Brazil’s Bovespa equity index

Korea’s KOSPI (which fell 3.5%)

and most interestingly, the small cap Russell 2000 equity index

Oversold (RSI < 30)

 Chinese Government 10 year bond yield (suggesting bonds where being bought aggressively)

AUD/GBP – telling me that the Pound is strong

the Hang Seng China Enterprises Index

The Oversold Quinella – Both Oversold and Traded at < 2.5 standard deviations above the weekly mean)

AUD/USD, where the AUD fell 3.2% for the week against a strengthening U.S. Dollar

Notable deletions from last week’s list include;

Tin following 16 consecutive weeks of being Overbought 

Australia’s ASX 200 after being Overbought for 4 weeks

the S&P 500

and the Oslo, Stockholm and Helsinki equity indices.

Notes & Ideas:

The sign-off from last week’s Macro Extremes edition was “ What a week is coming up” and indeed it did become so.

Most of the action seen in the past week were in the commodity currencies and in commodity prices themselves. We mainly saw declines in the energy, softs and hard metals. This was accentuated with the large move in the DXY rising above an important resistance line of 93.10 to close at 93.56. 

Other declines were amongst the equities markets where indices were seen falling between 2% and 6% for the week.

Declines were also evident in government bond yields, meaning that aggressive buying of bonds are sympathetic and symbiotic with falling equity prices.

On the topic of bond yields, the Aussie moved from 1.19% down to 1.07%, the Gilts fell from 0.58% to 0.53% and the Kiwi (bucked my last week prediction) to fall from 1.76% to 1.62%. The U.S. 10’s were unchanged. 

Inversely and perhaps as a predictor, the JGB’s were promising for the ‘risk-on’ community as they improved from 0.009% to 0.0170%. This ‘risk-on’ positive premise was mirrored by a big move in the U.S. 10 year minus Australian 10 year bond yield spread, moving from 0.0940% to 0.1850%, which sees it firmly moving above an important resistance line.

When coupling these two last indicators with an Oversold AUD/JPY, it is worth pondering that this week’s decline in equities will be brief and shallow.

This weekly ‘Macro Extreme’ note has previously reported Overbought extremes in equities and commodities and what you’re seeing now is that some are at the beginning of main reversion and others simply trying to develop a new trend. 

The most obvious extremes which I’m currently finding in the market is the depth of oversold in Asian equities namely those associated with Chinese equities.

The decliners over the past week included Tin (7%), Lumber (3%), Gasoil (6.2%), WTI Crude (9.2%), Brent Crude (7.5%), Copper (5.8%), Heating Oil (8.2%), Coffee (2.2%), Nickel (6%), Platinum (3%), Gasoline (10.5%), Silver (3%), Corn (5%), Soybean (6%), Wheat (4.5%), the CRB index (4.6%), the U.S. banking index (3.6%), France’s CAC 40 (4%), China’s CSI-300 (3.6%), the HSCEI (7%), the Hang Seng (6%), Bovespa (2.6%), Nikkei (3.5%), Taiwan’s TAEIX (3.8%) adding to last week’s 3% fall, the SOX (2.4%), the S&P Midcap 400 (2%) and the ASX 200 (2.2%).

Amongst the carnage, the S&P 500 only declined 0.6% for the week.

The only Advancers were the Copenhagen equity index rising 1.4% and the Gold price (as priced in AUD) rose 3.3%.

The most notable mover in crypto land was Cardano which rose 14%, adding to last week’s 52% advance.

And lastly, Bitcoin is trading 230% above its 200 Week Moving Average, which is higher than last week’s 215% reading and notably higher than the reading of 140% seen 6 weeks ago, while certainly lower when compared to its 466% peak in mid-April 2021.

August 22, 2021

by Rob Zdravevski

rob@karriasset.com.au