Sugar, Gasoline And The Move Index: What Fixed Income, Currency, Commodity And Equity Markets Are Telling Us
While the S&P 500 is rallying off support in the 3900 region the outlook for global GDP is looking increasingly negative as central banks raise interest rates heedless of the shortages, lockdowns and geopolitical disruptions afflicting the world. Financial markets reflect the contradictions in policy and tell a story of persistently high prices, declining incomes, rising national deficits and risks of a global recession spreading from Europe across Eurasia even to seemingly invulnerable China. Despite the recent equity rally the volatility risk premium points to a market fall 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 US yield curve is falling and in the current context that is bullish. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. Expect the These positive factors notwithstanding, expect the S&P 500 to fall over the next few days as the bear market resumes following the midsummer headfake.
Financial markets paint a bleak picture of declining global GDP growth and contradictory government policies. While equity derivatives are solidly bullish the charts of the major indices and the leading firms are unambiguously negative, while earnings guidance has slanted negative. Bond market technicals are even more negative and 15 nations are in fully inverted yield curves. Key to watch is bond market volatility (the MOVE Index), which has been consolidating but is likely to ratchet higher.
Currencies paint a horrorshow, as even countries with strong external positions, like China with its trade surplus or Japan with its investment income surplus (which drives its current account), can’t escape new multi-year lows. Only a few countries with idiosyncratic strengths or those performing market manipulations are resisting the $US rally, with high flying India likely to succumb to new lows next week.
Action in commodities suggests inflation has peaked but just as important for investors and consumers is whether disinflation will be as rapid as the runup in prices since 2021. This isn’t likely unless goods producers, retailers and rental firms further dig into their profit margins to lure customers. Falling gas prices are driving lower inflation prints and yesterday’s breakdown in oil will help drive gasoline futures lower, but not all refined and distillate products are falling, while natural gas is valiantly trying to maintain its bull run. Metals are rising again (though most have yet to break their downward trading ranges), while ags, meats and softs are mostly stuck in trading ranges. Key for many EMs is sugar prices, which is just 25 cents away from breaking down and starting a new downtrend. Shortages of key inputs for the commodity production process (i.e., fertilizer, which in turn requires fossil fuels) is one reason interest rates are rising and yet inverted, as most central banks around the world keep tightening oblivious to whether consumers are feeling the pinch of declining real incomes. These contradictions across politics and financial markets can only drive business confidence lower, and in turn lower valuations.
Yesterday I added to my short position in the S&P 500, consequently my current positions are a still large but smaller cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX), and the inverse levered ETF SPXU, all of which nets to a meaningful short position in equities.