Bulls Devour A Gallimaufry Of Financial News Hoping To Avoid Indigestion — What Fixed Income, Currency & Commodity Markets Are Telling Us
Equity bulls aren’t pleased with the lack of direction from corporate America or the mixed signals from their compatriots in the currency and commodity markets. For every middling report from a tech or consumer giant there’s an undeniably bad report that reveals the real state of stagflation and slowly worsening global economy. But for now the bulls are telling themselves their worst fears have been avoided, and 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 bearish. Yesterday's cross-asset action brought one positive factor for US stocks. Inflation expectations are stabilizing based on measures of Treasuries and TIPS. But there was also one negative factor across global asset classes. Copper and Oil charts are pointing to declining global GDP expectations. Expect the bulls to pitch another nasty curveball to the bears and send the S&P 500 toward 4200 the next few days.
Mixed earnings reports mask the continued low quality of earnings, which I don’t expect to improve as more reports come in this month. The American economy is slowing and the Chinese reopening is less than brilliant, pointing to tough times ahead. Ordinarily this would induce the Fed to cut rates and that’s what traders in treasuries are betting on, but the volatility of their trades continues to be elevated, portending another move up in yields. Currencies are mixed for this reason, making next week’s Fed statement all-important for gauging the direction of markets.
Commodities continue to signal volatility around stability, as steep rallies are followed by declines that would ordinarily leave central bankers comfortable were it not for the imperative to get inflation down quickly. Among fossil fuels oil and various distillates the rally earlier in the month has rolled over while other commodities in the energy complex are in danger of following. Precious metals are consolidating after strong run-ups but many industrials have rolled over to multi-month lows. Grains are rolling over while meats, softs and other ags are mixed. None of this helps accelerate disinflation, and should the Fed continue to signal discomfort with current inflation levels expect equities to begin a major correction that ends in a test of the October lows.
My current positions include a very large cash position, 3M (MMM), Pfizer (PFE), the levered ETF UPRO and inverse levered ETF SPXU, all of which net out to a modestly long position in large-cap equities.