Financial Contradictions Continue To Pound The Pessimists And Lift The Global Economy — What Fixed Income, Currency & Commodity Markets Are Telling Us
The rally in stocks, bonds, forex and most commodities is bad news for the Federal Reserve but dandy for bullish investors who sounds like Goldilocks before she encountered the three bears. I expect the contradictory views of bond investors vs equity investors to play out in favor of bond pessimists eventually, likely triggered by the Fed’s statement at its February 1 press conference. For now the volatility risk premium is pointing to a range-bound market over the next few days, while my technical reading of key stocks in the S&P 500 is neutral. Yesterday's action across fixed income, currency and commodity markets signified no meaningful changes to the global macro environment. Expect the S&P 500 to be rise moderately over the next few days.
The movement in equities, fixed income, currencies and commodities are contradictory and imply that something has to break within the next few months. The most flamboyant move have been in equities, which have been bullish since the 4th quarter, while bonds are only less spectacular but paint a bearish scenario. Currencies have been highly volatile and point to bullishness for global trade, while commodities have been mixed but veering to the bullish side. For the bulls to be right the bond markets in the US, Germany and many other European nations need to turn down on the long end and reflect the alleged surge in profits and sales to come in 2024. Right now bonds are expecting the Fed to continue hiking until the global economy goes into a mild recession, then ease in the second half of 2023 as the global economy slowly recovers. There is no way profits can stay even under such a scenario, nor can valuations stay elevated if interest rates remain normal for the foreseeable future.
Equity derivatives (e.g., the VIX, VVIX, SKEW and Volatility Risk Premium) are neutral despite relatively high actual volatility in the S&P 500 cash market, which is inherently bullish and corresponds to the relentless bear market rally we’ve encountered since the terrible inflation report on October 13. Bonds derivatives are becoming bullish as the move index breaks down, which implies that interest rates will continue lower instead of moving higher to reflect robust global growth. Commodities are mixed as fossil fuels are in danger of rolling over and precious metals likewise but tempered by key industrial metals which have broken out; foods, meats and softs are mixed to modestly higher, which is inherently bullish since it confirms the nearly uniform currency market environment of rising currencies against the $US. A reckoning of these higher input prices married to high interest rates and persistently negative corporate guidance is coming as winter plays out.
This morning before the market opened I closed out my short position via the levered inverse ETF SPXU. Consequently my current positions include an extremely large cash position, Goldman Sachs (GS), 3M (MMM), Pfizer (PFE), Starbucks (SBUX). I expect to re-enter the short side soon as the contradictions described above come to roost.