Opening gains in stocks are being given up as the past 2 days of trading is occurring.
Pessimism is growing amongst a host sentiment and survey indicators.
Really long term mean reversions are occurring or nearing.
Smaller investors seem jittery.
The AUD/USD is plunging. A visit to 0.6320 would be a 3 standard deviation event.
On September 9th, 2022, I wrote;
“I think prices will jump a little, drag in a few more people and then spit them out again in the coming week or three followed up with another swoon.”
For a bit of sport, I think S&P 500 has a terrible day during Wednesday’s session and the Aussie market will give up its early gains then sink further on Thursday before traders swoop in and start buying 2 hours before Thursday close not before they dump the same stock into Friday’s close before their long weekend on the Australian east coast.
With all this palaver about interest rates, people want to hear what the action is.
How is one expressing their investing view about the topic?
Bond yields are so stretched, that on a monthly basis, they are ‘this’ Overbought for only the 4th time in 35 years (as expressed in the U.S. 5 year bond yield chart with those circles on it)
If you like fixed interest, then you may consider buying a Bond ETF which owns a spread of such bonds…..
because, inversely those bond prices are at extremely Oversold levels, as the Monthly chart below shows.
I have posted a chart of one of those U.S. traded bond ETF’s
This is the case across the 5, 10, 20 and 30 year maturities.
Disclaimer: not personal advice, do you own research or speak to a licensed professional.
This chart updates the percentage which the DXY Index is trading above its 200 Month moving average.
Rare air indeed !
This may be the 7th inning, 8th or 9th….but it’s not the top of the 1st.
Incidentally, We are days away from closing the quarter and U.S. corporate earnings will be reported soon after. A reminder to look for management commentary in their earnings call about the effect the strong U.S. Dollar is having on their results.
The strong dollar is something the United States needs to be wary of because prolonged strength is adding to the probability of sustained inflation.
Commercial and military aircraft are costing the rest of the world let alone other U.S. goods and services.
More importantly, the majority of the major commodities are priced and traded in U.S. Dollars.
Rather than the Bank of Japan intervene and spend $21 billion (which is slightly more than the $15bn in U.S. aid sent to Ukraine) to buy and support their Yen…..
and rather than wait for the U.K. government or the Bank of England to crank up rescue packages to support the British Pound…
perhaps the U.S. Treasury (Janet Yellen) should start making announcements designed to weaken their currency?
Such action may possibly help your ‘friends’ in the G-10; help your own bond market (your cost of capital) and make the world a better place.
Keep in mind that a U.S. 10 year bond yielding 3.85% in isolation isn’t a concern until you ponder that the bonds of other nations are seemingly trading a ‘better creditworthiness’ of 3%.
But then again, the market may end up fixing it all for you.
However, the context is that we are nearing the end of these moves, rather than the start of a new trend.
If it turns out to be an extension of the existing trend, I remind myself that the last 10% of a ‘trade’ is often the most difficult part to be involved with.
The Bearish USD ETF is exhibiting extremes including being at the higher quintile of historical percentages which it’s trading below its 200 week moving average.
Anecdotally, all I am hearing is about U.S. Dollar strength. Now (the financial media) are calling referring to it as “King Dollar”.
Remember when 2 years ago, they were calling the demise of the U.S. Dollar?
I don’t think the market is about to break but many money managers may.
Peers are speculating whether there are big funds unwinded losing and problem positions.
Perhaps so but that often coincides with the ‘straw which broke the camel’s back’.
Many thought buying government bonds yielding 0.60% for 10 years to be a good bet.
In fact, many thought buying German bonds for a NEGATIVE 0.60% (as shown in orange in the chart below) was somewhat appropriate.
And their reward is………..a 20% loss of capital (with no interest coupon paid), as shown by the blue line of a German Bond (SDEU) ETF.
When you consider that “balanced” funds including those in the pension or insurance business may typically follow a model of allocating 60% of monies to equities and 40% to bonds, they may be double hurting as Germany’s DAX equities Index has fallen 24% from its peak.
That’s the reporting of what happened bit.
Now, many think this is ‘forever’. Many think trends and streaks don’t end, wane or reverse.
Consider the contrarian view to the extremes we are seeing?
On this Monthly chart, when Gilts yield were Overbought, the Pound Sterling was strong.
Today, Gilts are Overbought BUT Sterling is falling to new lows.
Who is wrong?
The FX market or the bond market?
Whilst FX is the most liquid market, the bond market is more believable.
However, have British economic woes decoupled where this traditional symbiotic relationship of a weak currency and higher bond yields is now resembling what we see in emerging market economies?
Albeit this is a dramatically painted scenario, I don’t think this is the case.
The long term strategy is to Buy British Pounds (GBP).
If you are in the business of needing to own debt, then buying U.K. 10 year Gilts at this juncture (the highest yield seen in the past 12 years) is worth considering.
Inversely, I don’t know why you would initiate a new short at 4.10%?
I haven’t seen any of the ’talking heads’ on business TV suggest shorting Gilts at 0.15% but now they are concurring that it goes higher.
Keep in mind that many are simply ‘reporting’ what is happening today but few seldom make a call identifying the extreme end of the pendulum.
Time will tell but I can’t help think many are doing the wrong thing, at the wrong time.
U.S. year bond yields have never seen 8 consecutive weeks of rising yields. Stocks and Commodities tend to see streaks lose steam in the 7th or 8th consecutive week.
We are closer to the streak ending.
The U.S. 10 year bond yield has never been Overbought on a Monthly basis, until now.
The U.S. 10 year bond yield has never been extended this many percentage points above its 50 month moving average.
The U.S. 10 year bond yield is near to trading up to 2.5 standard deviations above its rolling monthly mean for only the 5th instance in 40 years.
rob zdravevski's blog 