The vertical lines show the significance when the Japanese 10 year bond yield is (on a weekly chart) simultaneously OVERSOLD and trading 2.5 standard deviations and BELOW its rolling weekly mean.
Around the same time, the S&P 500 also registers a notable low.
There have been 9 such moments over the past 15 years when probability suggests nibbling and adding to your holdings.
BoJ and Fed news this week will be helpful shaping the JGB yield but this study suggests the S&P 500 low isn’t there yet. This doesn’t necessarily mean a lower low, but rather a ‘notable’ low.
Here are some WTI Crude Oil trend lines I’m watching.
The downward trend remains intact, however on a daily basis it’ll need a quick drop of $2-$3 in order to add some strength to this trend, otherwise we can kiss a visit to $77.50 and any notion of ~ $65 good bye for the time being.
Should this trend wane, it will correspond with the AUD/USD and the CRB Index finding a floor.
Bitcoin’s price action, trend and sentiment suggests it tests somewhere around the US$16,000 mark. +/- $600.
A drop in Bitcoin’s 30 day volatility precedes a trough in the price of BTC/USD which precedes ‘one more decline’ in the S&P 500 before itself finds a floor.
This would put my S&P 500 target around 3,645.
A bottoming process which builds into a rally in these two markets would cause much damage to all those huddled on the other side of the boat.
p.s. The direction Bitcoin also has reasonably good correlation with the Australian Dollar and commodity prices.
I am constructively bullish about commodity prices, however that opinion is not broad nor blindly so.
I’m working on how to express my best ‘absolute’ view in a specific commodity or theme. Buying scarcity and those who have capacity will be a key criteria.
I remind myself that commodities can trade sideways (as Rio Tinto did for 7 years) and the broader CRB Index had for a 10 year bear market.
While I find analysis on a ‘relative basis’ irksome, commodities are nearing another visit to being inexpensive relative to equities, as the CRB Index to Wilshire 5000 chart shows.
As much as I dislike the time spent speculating on such a definition, if I’m forced to pass an opinion, it’s looking like a mid cycle slowdown.
Irrespective, businesses adjust and we trade through the cycle.
Over the past 40 years, studies show that recessions are officially registered somewhere between 18 months and 22 months following the inversion of a country’s yield curve, being when the difference between the 2 year and 10 year bond yield trades into a negative percentage.
The jury is still out whether the 5 year minus 3 month yield is a better indicator to watch.
So back to the traditional 10 year minus 2 year…..and unlike the United States, the Australian yield curve is not inverted.
The red line in the chart below represents 0.00%.
The two things occurring which I think will invert this curve are;
1) an overzealous Reserve Bank of Australia hiking rates too much trying to correct the overly accommodating and subsidising government fiscal policy errors and;
2) a government which cuts off the nations (commodity supply and capacity) ‘nose to spite its own face’ by crimping production and export of gas, coal, iron ore and other minerals.
It’s the quantum of the rate rises which I am watching.
When you have a lot of debt and potentially stretched, it doesn’t matter what the absolute interest rate is.
You risk being wiped out if you can’t service the interest payments once your interest cost triples.
The chart below shows the travels of the U.S. 30 year government bond yield.
When rates were 6% in 1993 and then rose to 8% by 1995, it’s only a rise of 33%.
A rise from 5% to 6.7% as seen in 1998-2000 was only 33%.
During 2012-2014, 30 year rates moved from 2.5% to 3.9%. That’s an increase of only 55%.
The current rate cycle equals an increase of 300%.
My analysis is focused on the quantum of rate rises required, in order to temper credit applications and expansion which when combined with rhetoric will hopefully achieve the desired moderation of inflation.
And when we look at the developed world, we are much more closer to the end of the rate hikes than the beginning.
If the quantum of the rate rises expands, then there is risk to that large asset class known as residential real estate.
After all, the citizens of the developed world are awfully indebted while those in the developing economies (mentioned in the post below) have already experienced rate hikes of between 10 and 13 fold.
You can call it ‘front loading’ or anything else, but the cash rates along with 1, 2 or 3 year government yields of the developed world economies have already risen by the same factor of between 10 and 13 times.
So all this energy spent debating on where G12 central banks need to raise the absolute rate to, is futile.
But for the record, Canada currently has the highest interest rate out of all the G12 and a commodity sensitive (exporting) nation, they will a central bank to monitor for they have increased their policy rate 13 fold from 0.25% to 3.25%. The next BOC meeting is on October 26, 2022.
It’s time to get used to a new interest rate base from which central banks will work from and the investing effect is clear.
The absolute cost of capital has markedly increased and the return on investments will be adjusted lower.
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)
TBT
EUR/GBP
AUD/JPY
Overbought (RSI > 70)
U.S. 2 year government bond yield
German 5 year government bond yields
Spanish, French, 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.K. 10 year government bond yields
U.S. 5, 20 and 30 year government bond yields
German 2 year government bond yields
Extremes “below” the Mean (at least 2.5 standard deviations)
CAD/USD
NZD/USD
IEI
Oversold (RSI < 30)
Tin
Hot Rolled Coil Steel (HRC)
GBP/USD
JPY/USD
The Oversold Quinella – Both Overbought and Traded at > 2.5 standard deviations above the weekly mean)
CNH/USD
KRW/USD
TLT
Notes & Ideas:
The big news for the week is the outside bearish weeks posted by the Shanghai Composite, the DJIA, DJ Transports, MidCap 400, NDQ, RTY, SOX, S&P 500, the SmallCap 600, Copenhagen’s OMX 30 and the Swiss SMI.
The declines and reversals in equites was preceded by my note, 9 days earlier, that markets can be (are) cruel.
The Government bond yield continue to gather an ‘overbought’ stream but the US 5 year minus 3 month yield spread is not longer Oversold.
The consensus is that Europe is ‘on the nose’. The CAC and DAX lows were seen six months ago, in March 2022. Those indices are back visiting and testing those lows.
Meanwhile, the Hang Seng Index and HSCEI have made ‘lower lows’, while the S&P 500 made a lower close than last week’s low.
Re-resting of lows in equity indices will be something I’m watching.
This past week, the Russell 2000 mean reverted (200 week moving average) again, the Philadelphia Semiconductor Index (SOX) is close to its 1st visit in a long time, the S&P SmallCap 600 is 5% away from doing so while the ASX 200 is nearly doing so for the 2nd time in as many months.
We saw more in the energy complex accelerate their decline.
Diesel (Gasoil) fell 10%, the Japan Korean LNG Marker sunk 22%, and Heating Oil declined 11%.
My thoughts about the price of diesel halving were published 2 months ago.
The Baltic Dry Index has risen 40% in the past 2 weeks, showing demand for bulk shipping.
And Gold is working its way towards a buy target.
The larger advancers over the past week comprised of;
Baltic Dry Index 28%, Iron Ore 3%, Lean Hogs 4%, Nickel 9.5%, Orange Juice 1.9%, Platinum 2.8%, Silver in USD 3.3%, Urea Middle East 2.2%, Silver in AUD 5.8% and Soybeans rose 2.6%.
The group of decliners included;
Australian Coking Coal (2.3%), Rotterdam Coal(1.8%), China Coal (3.6%), WTI Crude (2.3%), Gasoil (10%), Copper (1.4%), Heting Oil (11.4%), HRC (3.6%), JKM (21.8%), Coffee (5.9%), Lumber (5.8%), Natural Gas (2.9%), Palladium (3%), Rubber (1.8%), Sugar (1.9%), CRB (1.9%), Cotton (7.6%), Dutch TTF (9.3%), Uranium (6.9%), Gold in USD (2.5%), Shanghai (4.2%), AEX (3.1%), KBW Banking (3.8%), CAC (2.2%), DAX (2.7%), DIA (4.4%), DJ Transports (8.8%), HSCEI (3.1%), HSI (3.1%), Bovespa (2.7%), S&P MidCap 400 (5.1%), Nasdaq 100 (5.8%), Oslo (2.7%), Copenhagen (6.3%), Helsinki (2%), Stockholm (2.7%), Russell 2000 (4.5%), Sensex (1.6%), SMI (2.7%), SOX (5.8%), S&P 500 (4.7%), FTSE 100 (1.6%), Toronto’s TSX (2%), S&P SmallCap 600 (4.1%), Nasdaq Biotech (3.9%), Nasdaq Composite (5.5%) and the ASX 200 fell 2.3%.
So, Oracle’s ‘currency headwind’ equated to nearly 15% of its quarter’s earnings.
No small change and it is a factual effect that the U.S. Dollar’s strength is having on American corporate earnings.
An extract from Oracle’s Q1 Fiscal 2023 earnings transcript is,
“The currency headwind this quarter was much higher than the 3% headwind that was present when we gave guidance. It was actually 6 points, even though due to rounding, it may look like 5%, and that’s a currency headwind to total revenue. It was, in fact, 6 points. And yet, we still exceeded our forecast on a reported basis, and we beat our constant currency revenue forecast by $200 million. We saw similar currency headwinds in EPS, which had an $0.08 negative effect, much worse than the $0.05 headwind present at the time of guidance in June.”
But with present USD strength being extended and stretched, in the spirit of positioning for ‘where the puck is going to be’, I’ll look for the contrarian effect to company earnings in the coming quarters.
In the meantime, well run Japanese companies should be ‘minting’ profits from their increasing competitive position of having a monumental weaker Yen.
On November 18, 2021, I wrote this note implying a peak in crypto currency mania with the news that a company called Crypto.Com paying $700 million for 20 years naming rights of a Los Angeles sporting arena.
This news was indeed such a harbinger that the peak was already in process, as the chart below shows….for only a week prior Bitcoin did peak at $69,000.
When you can’t analyse an asset by another means, anecdotes count for something.
p.s. I don’t know how a 71% decline is considered a ‘store of value’.
p.p.s. for the speculators, the dearth of interest in Bitcoin is suggesting it is nearing a new trough.
rob zdravevski's blog 