Macro Extremes (week ending March 24, 2023)

A weekly Macro, Cross Asset review of prices trading at extremes which may generate future investment ideas and opportunities.

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

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

Cocoa

U.S. 10 year minus U.S. 2 year yield spread

U.S. 10 year minus U.S. 5 year yield spread

U.S. 30 year minus U.S. 10 year yield spread

SHY

EUR/AUD

MOEX Index

Overbought (RSI > 70)

Hot Rolled Coil Steel (HRC)

Cattle

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

Gold (in AUD and CAD)

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

U.S. 5 year yield minus U.S. 5 year breakeven inflation rate

Australian 3, 5 and 10 year bond yields

Copper/Gold Ratio

U.S. 5 & 7 year bond yield

S&P GSCI Index

Brent Crude Oil

WTI Crude Oil

Wheat

AUD/EUR

AUD/JPY

AUD/SGD

BOVESPA

Sensex

ASX Small Caps Index

And the major equity indices in Norway, Finland, Switzerland, Singapore, Malaysia and Thailand

Oversold (RSI < 30)

U.S. 5 year minus U.S. 3 month yield spread

Urea (U.S. Gulf) 

Urea (Middle East)

KBW Banking Index

Lithium

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

None

Notes & Ideas:

Equities consolidated through the week and were mostly positive for the week, with Asian bourses posting solid weekly returns.

Australian indices were amongst the few to post a negative week. 

The U.S. he KBW Bank Index only fell 0.5% for the week.

The ASX 200 fell 0.6% for the week while the ASX Small Caps index declined 1.1%. It’s worthy to note that the former has registered its 7th consecutive losing week amounting to a cumulative decline of 8.3%.

Incidentally, the Nasdaq 100 has climbed 8% over the past 2 weeks which is notable outperformance compared to the 3% decline seen in the ASX 200 over the past fortnight.

Amongst bonds, yields fell again except for the Germans.

More of those government bond yields are starting to appear on the oversold extremes list.

Last week, I commented about a most dramatic observation seen in the U.S. 10 year minus 2 year bond spread (yield curve) where it moved from a ‘negative’ 2.5 standard deviation to a ‘positive’ 2.5 standard deviation reading within 1 week.

This is its first visit to +2.5 standard deviation (SD) land since March 1st, 2021 

What’s more, other U.S. yield curves joined the same +2.5 SD club this week.

While Japanese yields closed at levels resembling where it mostly traded over the past year.

And the U.S. 5 year inflation break-even rate completed its mean reverted to its 200 week moving average.

In commodities, we saw support across the energy complex except for the Gases.

Intra-week saw both Brent and WTI Crude trade down to 2.5 standard deviations below their weekly mean. The former also mean reverted to its 200 week moving average, a week after WTI Crude did the same. 

The significance of long term mean revision is being felt across many commodity prices whose preceding parabolic price rises were connected to the cause of inflationary pressures.

Today, Aluminium, Rotterdam Coal and many others are experiencing the gravitational pull of those means.

Meanwhile, Cocoa registered an oversold extreme when it traded 2.5 standard deviations (sd) below its weekly mean in September 2022 and now its 2.5 standard deviations above that same benchmark. In between this round trip, Cocoa’s price has risen 30%.

Silver added to last week’s performance, Copper had good week while Soybeans and Wheat eased towards oversold levels.

Gold continues to be overbought in various currencies and the JKM LNG price is creeping lower towards a possible buy target.

And I’ll remind myself that the Copper/Gold Ratio is ‘oversold’.

In currencies, the AUD continues to be weak against everyone with those extreme weakness listed this week.

The larger advancers over the past week comprised of;

Aluminium 3.5%, Cocoa 5.3%, WTI Crude 3.5%, China Coal 5.7%, Copper 4.7%, Tin 4.4%, Orange Juice 4.7%,Palladium 2%,Gasoline 3.5%, Brent Crude 2.7%, Silver in AUD 3.7%, Silver 2.8%, Oats 5.9%, Rice 4%, CSI300 1.7%, HSCEI 2.7%, HSI 2%, MOEX 3%, Nasdaq Composite 1.7%, Nasdaq 100 2%, Copenhagen 1.8%, S&P 500 1.5%, TAIEX 3%, SET 1.8% and Chile rose 2.7%.

The group of decliners included;

Baltic Dry Index (3%), Lean Hogs (3.4%), JKM LNG (3.7%), Lumber (8.4%), Natural Gas (5.2%), Nickel (1.8%), Cotton (1.7%), Dutch TTF Gas (4.1%), Soybeans (3.3%), Wheat (3.1%) and Brazil’s BOVESPA fell 3.1%

March 26, 2023

by Rob Zdravevski

rob@karriasset.com.au