Macro Extremes (week ending June 23, 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) either 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)

Lean Hogs

AUD/JPY

USD/CNH

Overbought (RSI > 70)

British 5 year government bond yields

U.S. 3 month bill yields

Cocoa 

Oats

Nasdaq 100

Nikkei 225

And Russia’s MOEX & Taiwan’s TAIEX equity index

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

British 2 & 3 year government bond yields

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

Coffee

Oversold (RSI < 30)

Brazil 10 year government bond yields 

Lithium Hydroxide 

Newcastle Coal 

Urea (Middle East)

CNH/USD

MYR/USD

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

Australian 10 year minus 2 year bond yield spread

Notes & Ideas:

Equities were lower across the globe.

Most of the index losses over the past erased the previous 2 weeks of gains.  

The Nasdaq Composite isn’t overbought this week while the more concentrated Nasdaq 100 remains so. The former snapped its 8 week winning streak.

Japan’s Nikkei 225 also saw an end to its gravity defying 10 consecutive week of gains. 

The S&P 500 and the SOX has eased away from overbought territory.

The KRE Regional Bank Index fell 8% this past week to see it close at the same price seen a month ago. Since its May 12th close, it has risen 8% in total.

We saw many indices registers declines of 2% or more over the week, although the Nasdaq 100 and S&P 500 ‘only’ declined 1.4%.

Worthy to watch is the bearish outside reversal week that Australia’s (XSO) Small Cap index registered.

Most Government bond yields fell.

Swedish, British and shorter duration American yields were the exception.

The U.S. 2’s saw their highest closing yield in 4 months but are not making a ‘higher high’.

While the U.K. 2’s and 3’s did make ‘recent’ higher highs and have achieved their highest yields since July 21, 2008.

Australian 10 year yield minus U.S. 10 year yield and Australian 2 year government bond yields are no longer overbought

The U.S. 3 month bill yield made a return to overbought territory. 

The U.S. 10 year minus U.S. 5 year yield spread registered its 7th consecutive ‘losing’ week.

The more ‘watched’ US10Y-US02Y is nearing oversold levels.

My obscure yield spread such as the U.S. 10 year bond yield minus Australian 10 year bond yield and the U.S. 10 year bond yield divided by Australian 10 year bond yield aren’t at any standard deviation lows.

The Australian 2 and 3 yer bond yields broke their streaks of 7th consecutive rising weeks with the latter recently seeing its highest yield since August 1st, 2011.

The Japanese 10 year bond yields closed at their lowest in 3 months.

Commodities were mostly weak.

Wheat, Rice, Lumber, Urea and Gas bucked that trend. The latter continue their advance from their recent oversold depths.

Energy contracts broadly erased the past 2 weeks of gains.

Agricultural’s either rose or held up well.

Copper erased last week’s gains. 

Precious Metals continue to perform poorly.

Over the past 2 weeks, WTI Crude Oil has now lost 6%, Orange Juice has eased 11% and Palladium has sunk 17%, while Lumber has risen 10%, Wheat climbed 18% and Natural Gas has soared 21% over the same time.

Palladium and Aluminium are nearing oversold levels and Platinum has fallen 19% over the past 2 months.

Uranium, Cattle and Sugar aren’t overbought anymore. The latter produced a bearish outside reversal week.

And Silver has mean reverted to its 200 week moving average.

In Currencies, we saw a reverse of last week’s ‘risk on’ form.

The AUD/JPY trading at an extended 2.5 standard deviations portends a peak in ‘risk taking’. Keep watching this currency cross if it make makes a quinella with an overbought RSI reading to possibly gives a more notable peak in ‘risk’.

The AUD gave up all of last week’s 2% gain and more, depending on the currency cross you are looking at. 

The Aussie lost 3% agains the CAD and USD.

The Kiwi/Aussie (NZD/AUD) registered a bullish outside reversal week.

The USD saw its highest close agains the JPY since October 31, 2022. The USD has now risen 10% against the Yen over the past 3 months.

And the USD rose 3% versus the South African Rand (ZAR).

The larger advancers over the past week comprised of;

Baltic Dry Index 15.2%, JKM LNG 5.7%, Lumber 6.6%, Lithium 2.5%, Natural Gas 3.7%, Urea U.S. Gulf 3.3%, Rice 1.6% and Wheat rose 6.4%.

The group of decliners included;

Aluminium (3.7%), Bloomberg Commodity Index (2.7%), Brent Crude (2.5%), China Coking Coal (2.1%), WTI Crude Oil (3.9%), Gasoil (4.7%), Copper (2.2%), Heating Oil (5.7%), Coffee (8.8%), Nickel (5.6%), Orange Juice (2.9%), Palladium (9.7%), Gasoline (6.1%), Sugar (8.5%), Silver (7.3%), S&P GSCI (2.8%), CRB Index (2.9%), Cotton (2%), Dutch TTF Gas (7.1%), Silver in AUD (4.5%), Gold in CAD (2%), Gold in USD (1.9%), Corn (1.5%), Soybeans (2.4%), Shanghai (2.3%), CSI 300 (2.5%), AEX (2.1%), KBW Bank Index (5%), CAC (3.1%), DAX (3.2%), DJ Industrials (1.7%), MIB (2.3%), HSCEI (6.4%), Hang Seng (5.7%), IBEX (2.4%), Nasdaq Composite (1.4%), KOSPI (2.1%), S&P MidCap 400 (2.5%), Nasdaq Biotech (2.1%), Nikkei (2.7%), S&P SmallCap 600 (3.1%), Oslo (4.2%), Copenhagen (3%), Helsinki (6.2%), Stockholm (3.8%), Russell 2000 (3%), SOX (4.5%), STI (2.1%), TSX (2.8%), FTSE 100 (2.4%), ASX 200 (2.1%), ASX SmallCaps (3.5%), Mexico (2.7%), KRE Bank Index (8.1%) and Thailand SET Index (3.5%).

June 25, 2023

by Rob Zdravevski

rob@karriasset.com.au 

Macro Extremes (week ending June 16, 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) either 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)

Australian 10 year yield minus U.S. 10 year yield

Lean Hogs

AUD/JPY

USD/CNH

BOVESPA

S&P 500 Index

Overbought (RSI > 70)

Australian 2 year government bond yields 

British 5 year government bond yields

Cocoa 

Cattle 

Sugar

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

British 2 & 3 year government bond yields

Taiwan’s TAEIX Index

Philadelphia Semiconductor Index (SOX)

Nikkei 225 Index

Nasdaq 100 Index

Nasdaq Composite Index

Uranium

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

U.S. 10 year bond yield minus Australian 10 year bond yield

U.S. 10 year bond yield divided by Australian 10 year bond yield

Oversold (RSI < 30)

Lithium Hydroxide 

Newcastle Coal 

Urea (Middle East)

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

Australian 10 year minus 2 year bond yield spread

Notes & Ideas:

Equities were strong.

Nearly every equity market rose.

Chinese equity indices aren’t oversold this week.

Meanwhile, the S&P 500 has returned to overbought extreme territory for the first time since early November 2021. 

The rotation) out of small and mid caps continued for a second week along with those rebounding U.S. banks which resulted in the larger cap and broader indices having a stellar week.

This move coincides with my recent writings (including client newsletters) that I was expecting this market to ‘rip’ higher. Some of the simple reasonings I provided were based on that was the direction where the market could do the most damage.

The Nasdaq Composite is now in a 8 week winning streak and registered an overbought quinella last seen in November 2021 Avid readers would recite that streaks lasting beyond 7 weeks are rare. In other words, ‘going long’ on the last couple days of this past week doesn’t provide the best odds and probability.

To test this theory, Japan’s Nikkei 225 Index just completed a 10 week rising streaks, cranking out a 22.5% advance.

While for some reference, the Dow Jones Industrials returned 1.2%, the S&P 400 Midcap advanced 1.2%, the Russell 200 rose 0.5%, Toronto’s TSX improved 0.4%, Australia’s Small Caps climbed 1.6% and the S&P Small Cap 600 firmed 0.3%.

Government bond yields broadly rose again, although the U.S. 3 month bill yield is no longer overbought.

We are still seeing some obscure bond yield spreads feature in this weeks list.

The Australian 2 and 3 yer bond yield are now in their 7th consecutive rising week with the latter closing at its highest yield since August 1st, 2011.

While I find it interesting that the 10 year yields in Spain, France, Germany, Australia, the U.S. and the U.K. are not making new highs.

Brazil’s bond yield has been moving in the opposite direction to many (see my note written earlier this week) and it nearing an oversold reading. I may write about interest rate differential soon.

The Australian 10 year minus 2 year bond yield spread close at its lowest point since July 2008 as it continued being oversold while it also traded 2.5 standard deviations below its weekly mean. The last time we saw this spread register both oversold extremes was in August 2019.

Commodities were strong across the board. Some prices soared and very few appear in the losing column this week. 

And so, the Dutch TTF and JKM LNG Gas markets aren’t oversold anymore nor is the U.S. Gulf Urea price.

Although, broadly speaking many of the moves may be categorised as a ‘bounce’ or an extension of mature bullish trends, rather than the beginning of new trends.

Agricultural’s were amongst the notable commodities which bounced well, although some contract expiration and ‘rolls’ affecting some prices.

Oats have risen 18% in the past 2 weeks, sugar is up 6% over the same time

In Currencies, “risk on’ for the week was evident, particularly seen in the AUD as it rose across its various crosses 

The correlation in risk-taking explains the positive week seen in commodities and equities.

The AUD was strong again, adding 2% again most crosses, adding to last weeks 1.5% advance.

The Aussie notably rose 2.6% against the Indian Rupee for the week.

While the USD was weak compared all except the Yen.

The larger advancers over the past week comprised of;

Bloomberg Commodity Index 4.1%, Baltic Dry Index 2%, Cocoa 1.9%, WTI Crude Oil 2.5%, Gasoil 5.5%, Hogs 5.7%, Copper 2.6%, Copper/Gold Ratio 3%, Heating Oil 8.1%, JKM LNG 21% (even after a 18% drop on Friday), Lumber 2.9%, Tin 6.9%, Natural Gas 16.8%, Nickel 5.9%, Orange Juice 3%, Palladium 8.5%, Gasoline 3.4%, Sugar 4.1%, S&P GSCI 3.2%, CRB Index 4%, Dutch TTF Gas 9.2%, Brent Crude Oil 1.8%, Corn 13.3%, Oats 11.7%, Soybeans 11.9%, Wheat 11.3%, CSI 300 3.3%, AEX 1.8%, CAC 2.4%, DAX 2.6%, DJ Transports 3.9%, MIB 2.6%, HSCEI 3.7%, Hang Seng 3.4%, IBEX 2%, BOVESPA 1.5%, MOEX 3.4%, Nasdaq Composite 3.4%, Nasdaq Biotech Index 2%, Nasdaq 100 3.8%, Nikkei 225 4.5%, SOX 4.2%, S&P 500 2.6%, STI Index 2.3%, TAIEX 2.4%, Nasdaq Transports 3.5% and Australia’s ASX 200 rose 1.8%.

The group of decliners included;

Aluminium (3.1%), WTI Crude Oil (2.1%), Iron Ore (3.2%), Orange Juice (7.8%), Palladium (7.4%), Cotton (2.3%), Brent Crude Oil (1.7%), Corn (2.1%) and Switzerland’s SMI Index declined 1.7%.

June 18, 2023

by Rob Zdravevski

rob@karriasset.com.au 

Now, inflation is near it’s low

I began writing in early 2022 that I expect prices (commodities and others) to decline within a combined thesis of mean reversion, inventories being ‘built-up’ and ultimately a pending decline in demand or a buyer’s strike in some circumstances.

In July 2022, this note showed a bunch of charts where I called for a cascade in commodity prices varying between 30% and 60% from prices at the time. We have seen that.

Commodity prices fall 30%-60% will moderate inflation

Then, on August 2, 2022 I followed with a note which explained more of my thinking about why inflation will decline. It also contained a few more links referencing previous notes about the same subject.

Inflation is being left on the shelf.

And then on November 1, 2022 this note contained more charts illustrating the deflationary pressures I was seeing in markets and asset prices.

Within, I said that I thought the U.S. inflation rate would abate to somewhere around 4% – 5%.

Today’s prices look deflationary

That has now happened.

Yesterday, the latest U.S. inflation rate was reported at 4%.

In the attached chart, you will notice how powerful the gravitational pull of that 50 month moving average is.

The previous month, that reading was 4.9%.

Now, I believe that the decline in inflation is nearing an end.

Coming inflation reports over the next 1-3 months may see it reach 3.5% (remember that reported inflation data is a lagging indicator) but that is splitting hairs. The big move has been seen.

Next, I look for inflation to hold these levels at the very least and commence a march up to 6.5% region……..

and so off to figuring out the trades that will benefit from this view.

June 15, 2023

by Rob Zdravevski

rob@karriasset.com.au