German bond yields to halve

Currently the German 5 year bond is yielding 2.73%, I have a view that within a ‘mid cycle slow down’ this bond may yield between 1.12% and 1.33% within the next 15 months.

If so, (as the chart below implies) this means the price of the German bond would rise and thus the price of the Nasdaq 100 (or let’s broadly say technology stocks) will do the same.

Other than than a lower cost of capital, there are also other scenarios and considerations should this opinion develop.

One example would include relief for banks, insurance and pension funds who are presently suffering from unrealised mark-to-market losses on their longer dated bond maturities.

More on other scenarios later.

April 4, 2023

by Rob Zdravevski

rob@karriasset.com.au

Watching Urea and its cousins in price action

I’m still waiting for the price of Urea to crater.

In January 2023, I wrote this…

Urea – Accumulate Signal

I am yet to initiate any long positions in Urea or other correlated price relationships.

Moreover, the price action in Urea isn’t acting in a healthy manner.

This view is being influenced by my opinion that Natural Gas may either fall or rise by 60% from its recent $2.50 price.

Natural Gas can be dangerous

My bias is for lower Natural Gas prices and thus we should see pressure on Urea, Wheat and Fertilser prices too.

Middle Eastern Urea prices join the Oversold parade

That’s where the buying opportunities will appear but I am waiting for now.

April 2, 2023

by Rob Zdravevski

rob@karriasset.com.au

Price relationships of….Hot Rolled Coil Steel

Here is an idea to extract from my weekly Macro Extremes publication.

Hot Rolled Coil (HRC) Steel is currently registering an Overbought reading.

Then I overlay the price of a steel producer such as Nucor.

I look for correlation and matching extreme moments, which uncannily appear.

The ellipses in the chart below point to moments when Nucor’s stock price is Overbought on a weekly basis and trading at extreme percentages above its 200 week moving average.

This can spit out a bunch of scenarios such as; a) sell or short Nucor, b) short or sell HRC, c) if you’re a producer you may want to lock in your near/mid term selling prices, d) if you a buyer of steel perhaps hold off doing so as probability suggests you’ll get lower prices or e) don’t chase or initiate a new buy in the equity of steel producers.

Keep in mind, that I’ll compliment this empirical study with some fundamental analysis.

But 2nd and 3rd derivative effects can then move seeing how Hot Rolled Coil Steel prices act against U.S. GDP, government bond yields or the U.S. 5 year inflation break-even rate.

Then you’re off, extrapolating and comparing a load of price relationships to help cross reference your view on the direction of the AUD/USD perhaps.

April 2, 2023

by Rob Zdravevski

rob@karriasset.com.au

Macro Extremes (week ending March 31, 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)

None

Overbought (RSI > 70)

Hot Rolled Coil Steel (HRC)

Cattle

Orange Juice

Gold (in AUD)

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

Cocoa

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

AUD/IDR

Oversold (RSI < 30)

Urea (U.S. Gulf) 

Urea (Middle East)

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

Lithium

Notes & Ideas:

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

The ASX 200 broke its 7 week losing streak

The KBW Bank Index continued to find some support.

The Nasdaq 100 continues its climb, now adding up to 11.3% over the past 3 weeks. Lagging behind is the S&P 500 having climbed ‘only’ 6.4% over the same time.

Heck, Stockholm’s OMX 30 did 6.5% just this week alone.

Ahh, remember when that was considered an adequate return for the year?

Amongst bonds, yields generally rose across the government debt of the world.

Many of the spreads listed as ‘extremes’ in last week’s edition are no trading there now. The same is for other bond yields.

Commodities were generally stronger with strength saw support across the energy complex except for the Gases.

Strength in Crude Oil also helped the commodity indices get out of Oversold territory. In fact, WTI Crude has risen 12.7% in 2 weeks.

It’s worthy to note that U.S. Mid West Hot Rolled Coil (HRC) Steel has doubled over the last few months,

And Gold in CAD is no longer Overbought.

In currencies, the AUD was steady to firm amongst its crosses whilst the Yen saw weakness against everyone.

The larger advancers over the past week comprised of;

Aluminium 3.3%, Rotterdam Coal 4.3%, Bloomberg Commodity Index 2.4%, Cocoa 1.7%, WTI Crude 9.3%, HRC Steel 10.1%, JKM LNG 6.4%, Cattle 3.3%, Tin 10.9%, Nickel2.7%, Orange Juice 6.1%, Palladium 3.8%, Platinum 2%, Gasoline 3.6%, Sugar 6.9%, SPGSCI 4.5%, CRB Index 3.6%, Cotton 8.2%, Dutch TTF Gas 16.4%, Brent Crude 7%, Silver in AUD 3.1%, Silver 3.9%, Corn 2.7%, Soybean 5.4%, AEX 3.3%, KBW Banks 4.7%, CAC 4.4%, DAX 4.5%, DJ Industrials 3.2%, DJ Transport 5.3%, MIB 4.7%, HSCEI 2.6%, Hang Seng 2.4%, IBEX 5%, Bovespa 3.1%, Nasdaq Composite 3.4%, KOSPI 2.6%, S&P MidCap 400 4.6%, Nasdaq Biotech 2.4%, Nasdaq 100 3.3%, Nikkei 225 2.4%, Oslo 4.5%, Copenhagen 3.2%, Helsinki 3.6%, Stockholm 6.5%, Russell 2000 3.7%, Sensex 2.6%, S&P SmallCap 600 3.9%, Swiss SMI 4.4%, SOX 3.5%, TSX 3.1%, FTSE 100 3.1% and Australia’s ASX 200 rose3.2% and the ASX Small Caps climbed 4.3%. 

The group of decliners included;

Australian Coking Coal (14.6%), Baltic Dry Index (6.7%), China Coal (7.1%). Lean Hogs (2.5%), Heating Oil (2.8%), Coffee (4.9%), Lumber (10.2%), Urea Middle East (5.8%), Gold in CAD (2.1%) and Rice fell 2.6%.

April 2, 2023

by Rob Zdravevski

rob@karriasset.com.au 

Longer, Long Term – March/April 2023

Under the category of trying to get the big calls over the ‘longer, long term’ right,

I currently see the following macro ideas as actionable.

The prices & timing are nuanced for each of them.

Sell:

Cattle

Orange Juice

Sugar

Gold in AUD

Buy:

KBW Bank Index

U.S. 2 year and 5 year bonds

German 5 year bonds

Possibly Soon:

Buy:

Palladium

Sell:

FTSE 100

CAC 40

Gold in USD

EUR / buy AUD

EUR / buy GBP

SGD / buy AUD

March 30, 2023

by Rob Zdravevski

Karri Asset Advisors

rob@karriasset.com.au

Preparing to increase allocation to Small Cap equities

My various signals and studies are prompting me to prepare to initiate/increase weightings towards Small Cap equities.

This will apply to Australian and U.S. small caps.

The chart below is a snippet showing the mimicry and correlation between weekly prices of the Copper/Gold Ratio and the Nasdaq Small Cap 700 Index.

Clients will separately receive supporting research, entry prices and the securities which I’ll use to express this view.

March 29, 2023

by Rob Zdravevski

Karri Asset Advisors

rob@karriasset.com.au

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