The Bulls Are On Fire But So Is Volatility — What Fixed Income, Currency & Commodity Markets Are Telling Us

The anodyne setting of the centrist Brookings Institution gave the markets an unintended ray of sunshine during these dark days as Jerome Powell spoke and answered questions without any clear incendiary words. This is what the markets were geared for as the volatility risk premium points to a higher market over the next few days, while my technical reading of key stocks in the S&P 500 is bearish. Yesterday's cross-asset action brought several positive factors for US stocks. Copper's chart is signifying global growth. The action in major currencies indicates the $US is weak. The US yield curve is falling and in the current context that is bullish. But there was also one negative factor across global asset classes. Oil is pointing to stagflationary conditions. Expect the S&P 500 to rise modestly over the next few days before coming down hard through December.

Equity volatility rose yesterday and will continue high through December, presaging another leg down. Bond volatility has failed to break the uptrend and implies a run back to the early November highs in interest rates. The great hope for the bulls is disinflation accelerates and leads to a Fed pivot in late 2023, allowing for above-average valuations. But indications of disinflation so far point to moderation rather than acceleration. Data on wages and retail sales point to strong price pressures while commodity markets point to stable prices if not rising prices. Fossil fuels are range-bound and foods and softs are well behaved while metals are rising again. Financial markets together are telling us 2023 will see continued volatility and central bank pressure on the global economy, making a retest of the October lows simply a matter of time.

My current positions include a large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and the ETF SPXU, all of which nets out to a large short position in equities.