In early July 2022, the Copper/Gold Ratio registered its 7th weekly oversold reading within 12 years.
This occasion coincides with a notable low, or at least safer, longer term buying opportunity in stocks…..or as the chart below implies, in the S&P 500 Index.
In other posts I have mentioned how the monitoring of this ratio is also helpful in tracking the direction of interest rates.
In the meantime, I’ll watch if the Copper/Gold ratio re-visits the oversold region in the coming 3-8 weeks.
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)
Australian 3 year government bond yield
U.S. 10 year minus Australian 10 year bond yield spread
Overbought (RSI > 70)
Greek, Spanish, Portuguese, Italian and U.K.10 year government bond yield
U.S. Dollar Index (DXY)
The Overbought Quinella – Both Overbought and Traded at > 2.5 standard deviations above the weekly mean)
U.S. Dollar Index (DXY)
Australian 2 year government bond yield
U.S. 2. 5, 10, 20 and 30 year government bond yields
German 2, 5 & 10 year government bond yields
French, U.K., Korean and Swedish 10 year government bond yields
TBT & TBX
AUD/GBP
EUR/GBP
Extremes “below” the Mean (at least 2.5 standard deviations)
U.S. 10 yes minus U.S. 5 year bond yield
AUD/USD
CAD/USD
Copenhagen and Helsinki equity bourses
Oversold (RSI < 30)
Tin
Hot Rolled Coil Steel (HRC)
EUR/USD
DKK/USD
JPY/USD
Taiwan’s TAIEX and H.K.’s Hang Seng equity indices
The Oversold Quinella – Both Overbought and Traded at > 2.5 standard deviations above the weekly mean)
GBP/USD
KRW/USD
NZD/USD
SEK/USD
SGD/AUD
IEF, IEI & TLT
Switzerland’s SMI equity index
Notes & Ideas:
The big news for the week is broad.
Government bond yields reached extreme peaks with all of the major U.S. durations doing so.
The CRB (commodities) Index fell 4%.
Equity bourse declined between 4% – 7%.
The fall in equities honoured the preceding weeks observation about Bearish Outside Reversals.
The S&P MidCap 400 and SmallCap 600 have fallen 11% in the past 2 weeks. I had warned that the markets were about to play a cruel trick on those who believed in the previous rally.
A couple bourses went into Oversold territory and TAEIX has done it for the 2nd time within 3 months.
While many bourses complete their mean reversion to their 200 week moving average, such as Copenhagen, CAC, S&P Midcap 400, the SOX……the ASX 200 and Nasdaq Composite have double dipped to their 200 WMA.
The S&P 500 is 108 points (or 3%) away from visiting its 200 WMA. The Nasdaq 100 is 153 points or 1.4% above its 200 WMA. That’s something to watch for this coming week.
Chinese and H.K. indices continued to make lower lows with the Hang Seng (HSI) ‘going’ oversold.
Currencies continue to be in the news, in particular the strength of the U.S. Dollar and the corresponding weakness in others.
The Aussie divergence continues as cited in this post.
So, I’ll watch for how the AUD/USD and WTI Crude symbiotically test their next respective levels of 0.6464 and $77.50, as neither ‘daily’ downtrends are confirming continuing strength.
Hint: probability is rising that we are at the tail-end (+/- 3%-6%) of the downdraft in both assets.
“He {Labor federal Treasurer Jim Chalmers} has warned that the budget cannot rely on temporary revenue windfalls from high export prices for iron ore, coal and gas.”
…..but Australia is heavily reliant on those commodities, their exports and the tax revenues.
This plays into the pragmatic comments Greg Sheridan made in his article titled “Our Climate Fantasy” dated July 30, 2022 (The Australian newspaper).
To paraphrase some of the article,
‘Australia has many projects set to go and it is important that Prime Minister Albanese rejects bans for the commencement of new gas and coal projects’.
“Resources and minerals are irreplaceable in our economy”
“moving to net zero will be expensive and reduce our living standards”
Australia needs to continue to develop its resources to help pay for the running a country this large (in area).
Whilst there is no capital gains garnered from the largest (subsidised) asset class in the country, being owner-occupied residential real estate, revenues from a dwindling individual tax paying base let alone the manufacturing or financial are not enough to cover the gap.
One needs to keep in mind that Australia can’t export solar, wind or hydro energy.
How reliant is Australia on ’these’ commodities?
Of the total credits of goods exported (FY 21-22) being $534 billion, metals ore and minerals ($172bn), coal $113bn), other metals ($14bn) and fuels ($87bn) accounted for $386 billion or 72% of all exports. (source: Australian Bureau of Statistics)
And as reluctance to finance new project grows in lock step with shareholder ESG related pressures, the opportunities lie with the incumbents in those industries.
Climate activists are seemingly unaware of the financial and commercial reality behind notions such as government receipts, or being the lowest cost producer, the cost of building alternative power sources and the need for base load power for the modern world many enjoy.
I don’t think exporting fitness supplements, television programming, insurance or financial services adds up to much.
p.s. don’t bother replying to me using your laptop, mobile phone or internet connection let alone physical mail for it all requires some form of hydrocarbon, silver, silica, copper, chemical….in order for the message t0 be constructed and sent. If you are reading this, you are likely to be utilising many or all of those components.
Ahhhh…is carrier pigeon considered animal cruelty?
On September 7, 2022, I dispensed comments to clients about my views on the AUD/USD.
I cited how perverse it was that the Aussie was strong versus the EUR, GBP and JPY….
while it continued to weaken against the USD.
This so called perverse scenario is because you don’t generally see AUD strength against other G-8 currencies whilst it inversely exhibits weakness against the USD.
Then, I thought it was appropriate for operational businesses (whether requiring to do so physically or for hedging purposes) is to…….
1) take your strong AUD and buy either GBP, EUR or JPY (the Aussie has since weakened 1.4% against these crosses)
but then…..
2) prepare to sell your strong USD and buy AUD
Back then (Sept 7th), the AUDUSD was trading at 0.6717.
My advice said that it needs to trade below 0.6680 if it is to make a move to 0.6464.
But I noted that the AUD/USD is within the process of being in the lower quintile (the last legs) of the larger downtrend which commenced at 0.7600 in April 2022.
Now, I think it’s time to prepare for the 2nd piece of that previous commentary.
Overnight, the AUD/USD broke below the 0.6680 level mentioned.
At the time of writing it is now trading at 0.6590.
It has weakened 2.6% since September 7th, 2022.
The velocity of the downtrend is increasing, albeit slightly.
However we are nearing interim support of 0.6560
I still see the 0.6460 region as major support.
My work and probability suggests locking in hedges or actually Selling USD / Buying AUD around this 0.6580 – 0.6460 mark is prudent.
A visit to 0.6340 would be an outlier 4 standard deviation, only seen twice in the past 20 years.
Since August 25, the price of Natural Gas is 23% lower and the S&P 500 has declined 10%.
Commensurately, the share price of Oil & Gas companies have generally eased.
Some examples include Woodside and Exxon Mobil falling 9% while Occidental swooned 16%.
In that note, I called a $5 target for Natural Gas.
Well…….3 days ago NG traded down to $7.40.
To channel lyrics from a Bon Jovi song,
‘We’re half way there”.
I’m not sure if I want to insert the other half of that lyric being “Whoa, livin’ on a prayer” as my thesis seems to be based on more than a prayer.
But we are seeing deflationary news being presented right in front of our very eyes.
Gas, Oil and Gas (and derivative products such as Gasoline, Heating Oil and Distillate) prices have been falling for some months. So I remind myself that inflation reports publish lagging data and with the energy complex being both a large weighting of the inflation calculation and the last holdout in a broader decline amongst a host of commodity prices………
I’m amazed that the market pundits are ‘counting’ the rise in prices into their inflation argument but not acknowledging the subsequent decline in those prices as being plausible causes for an abating effect in future inflation readings.
Energy inputs are falling and this will have various positive effects on business and the consumer.
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