Energy correlations & buying moments

Followers would recall my notes about peaks and mean reversion calls in various assets including energy.

I’ve been bearish on energy prices soon after the Russian/Ukraine war commenced.

Middle East Urea prices have mean reverted, falling from $900 to $290.

The Japan/Korea Market (JKM) LNG price has tanked from $68 to $9.

Now, I am preparing to buy and am becoming bullish on energy prices again.

The first chart attached chart shows the correlation between Urea and JKM LNG.

These correlations extends across many other commodities, stock prices and currencies. 

The next chart is the Rotterdam Coal price compared to the JKM LNG price.

Lows in selected energy prices are likely be “put” in before the majority realise it.

Other energy prices such as Heating Oil, Crude and Distillates still have some lower travel before they bottom.

The 3rd chart in this series perversely compares the Dutch TTF Gas price to that of Wheat.

Remember when the financial media were reporting about these energy prices in recent months, after they had already tripled and on their way to peaking?

May 28, 2023

by Rob Zdravevski

rob@kariasset.com.au

S&P 500 – constructive but trend less

Amidst a trend less equities market, the good news is the S&P 500 is acting and trading constructively.

The low seen in March 2023 did not break the low seen in December 2022.

This past week, it made a recent ‘higher high’, when it traded at 4,213, which is above the 4,195 high seen in late January 2023.

In the interim, there is a ‘daily’ gap at 3,980 which I expect the S&P 500 to trade down to and ‘fill’.

That’s 3.3% below today’s closing price of 4,115.

The next ‘higher high’ that it needs to test is the August ’22 high of 4,325.

Although, this remains a market which I am ‘dating’ and not one that I’m ‘marrying’.

My notable, medium to longer term buying signals are nowhere to be seen.

May 25, 2023

by Rob Zdravevski

rob@karriasset.com.au

Macro Extremes (week ending May 19, 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)

British 10 year government bond yields

Overbought (RSI > 70)

Australian 3 month bank bill yield (90 day swap rate)

U.S. 3 month government bond yield

Cocoa

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

Nikkei 225

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

China 10 year government bond yields 

Copper

Oversold (RSI < 30)

JKM LNG Gas

Lithium Hydroxide 

KRE Regional Bank Index

ZAR/USD

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

Corn

Soybeans

Notes & Ideas:

Equities showed life following weeks of sideways travel. The moves can’t be described nor confirmed as a new trend or the ‘rip’ higher, the latter being something I have written to clients about recently.

While it’s worthy to note many equities markets are yet make any type of ‘higher high’.

The KBW Bank index rose 6% for the week, more than reversing last weeks 3.5% decline and it’s no longer oversold.

While last weeks bearish outside reversal seen in South Korea and Taiwan didn’t materialise into weakness.

For the week, the ASX 200 rose 0.3% and the ASX Small Caps fell 0.9%.

Government bond yields generally rose, except for Türkiye’s.

In this weeks list, the British 10’s entered an overbought territory while the other 2, 3 and 5 year durations are nearly doing the same.

And the U.S. 5 year bond yield minus U.S. 3 month bond yield isn’t oversold this week.

Commodities were broadly higher with energy generally faring well while the ‘softs’ (agriculturals) suffered the largest declines along with Tin and Nickel.

Sugar is no longer overbought nor is Gold as it is priced in AUD.

Australian Coking Coal is closing in on its 200 week moving average.

JKM LNG continues to close at its lowest point in 3 years and Heating Oil broke its 7 week losing streak.

Currencies 

We saw the AUD mixed, the EUR slightly weaker while the USD broadly firmed.

The USD/JPY is edging towards an overbought extreme.

The larger advancers over the past week comprised of;

Cocoa 2.8%, Aluminium 2.8%, WTI Crude 2.4%, Iron Ore 3.3%, Gasoil 3%, Heating Oil 2.5%, Coffee 5%, Lithium 3.7%, Natural Gas 14.1%, Orange Juice 6.4%, Gasoline 6%, CRB Index 1.6%, Cotton 7.7%, Brent Crude 2.2%, AEX 1.9%, KBW Bank Index 5.8%, DAX 2.3%, BOVESPA 2.1%, Nasdaq Composite 3%, KOSPI 2.5%, Nasdaq 100 3.5%, Nikkei 4.8%, Stockholm 2.3%, Russell 2000 2%, S&P Small Cap 600 2.4%, SOX 7.8%, S&P 1.7%, TAIEX 4.3% and the KRE Regional Bank Index soared 7.8%.

The group of decliners included;

Baltic Dry Index (11.2%), JKM LNG (11.5%), Tin (5.2%), Nickel (4.3%), Sugar (1.7%), Dutch TTF (7.9%), Gold in AUD (1.8%), Gold in CAD (2%), Corn (5.4%), Oats (3.9%), Rice (7.7%), Soybeans (6%), Wheat (4.7%), Lumber (1.8%) and Thailand’s SET Index fell 3%.

May 21, 2023

by Rob Zdravevski

rob@karriasset.com.au 

Aussie interest rates are stretched and peaking

The study below suggests Australian interest rates will decline over the coming 8 – 15 months.

The circles denotes moments when the Australian government 2 year bond yield simultaneously trades 2.5 standard deviations above its rolling weekly mean, registers a weekly overbought reading and most importantly, it is at a certain extended percentage above its 200 week moving average.

When this event occurs, the probability of mean reversion heightens.

Such an event has only occurred 6 times over the past 35 years.

It highlights a moment when investors may consider allocating a higher proportion of monies towards bonds or fixed income or perhaps locking rates for their cash or term deposits.

Furthermore, borrowers should ponder leaving staying flexible and variable with their interest rates. In other words, you should have a chance to fix rates at lower levels in the months ahead.

For equity investors, moderating interest rates will provide their own trades and opportunities.

Just for kicks, I’ve place the Australian inflation rate (in orange) to show the symbiotic dance it does with the direction of interest rates.

May 19, 2023

by Rob Zdravevski

rob@karriasset.com.au

Understand FX and credit first

I often write about currencies and bonds because I think it’s important to study and understand those markets before one understands equities.

I believe what the currency and credit markets say before I believe what the equity market is telling me.

The equity market is where the most stories are being told and where dreams are being sold.

Watch out for ‘rips’

While I have a broader cautious stance on equities, my current read of the tape suggests equities could ‘rip’ higher…..but be careful.

It’s tricky as it’s not from a notable low and it’s a trading market.

I’ll be watching whether various currency crosses (such as the AUD/JPY) break higher thus confirming an increase in risk appetite.

Also, the AUD/USD is firming but I need a couple nuances to tip over to confirm a move higher.

The S&P 500 weak upward trend (and it’s yet to make a higher high) is juxtaposed against the strength seen in the Nasdaq 100’s trend.

While the Russell 2000, Mid Caps, Small Caps and Copper are in a down trend with all of them a whisker away from those trends confirming strength.

Incidentally, the ASX 200 is yet to make a higher high than the 7,625 seen in April 2022.

Invariably, at moments like this, markets move to where they can do the most damage….and that could be up…but be careful.

I think that the upcoming 2-3 weeks warrant unusual attention.

May 15, 2023

by Rob Zdravevski

rob@karriasset.com.au