Investors Sound More Like Janus-Faced Politicians As The Markets Diverge From Each Other — What Fixed Income, Currency & Commodity Markets Are Telling Us
Contradictions made respectable under Biden and Trump now afflict the financial markets, where things that simply can’t run together somehow do so and leave the bulls sounding like ineloquent boosters and the bears like delusional losers. More is in store now that the equities have shrugged off the hawkish tone of the Fed and the related selloff in short-dated bonds. The volatility risk premium points to a higher market over the next few days (though volume may be light since the VRP could easily reverse and catch investors offside), while my technical reading of key stocks in the S&P 500 is neutral. Yesterday's cross-asset action brought one positive factor for US stocks. The action in EM currencies indicates the $US is somewhat weak. But there was also one negative factor across global asset classes. The US yield curve is rising and in the current context that is bearish. Expect the S&P 500 to rise modestly over the next few days before coming down hard later this month.
Divergences in currency markets reflect the disconnect between investors and policymakers across the political-economic landscape. Many EM currencies are rallying along with the € but the other majors like Chinese Yuan are declining while hopes are fading for the Japanese Yen. Currencies reveal the lack of a compelling global growth narrative, yet equities around the world are booming as if this is the beginning of a new economic cycle. After the large moves up in both valuations and interest rates the derivatives markets are forecasting consolidation in equities and bonds, suggesting even more upside as summer begins. The jarring antimony between this twin rally can only resolve to the bulls’ favor if the Fed turns neutral from hawkish, the precise opposite of what the published forecasts reveal.
Higher rates for longer and low global growth is the obvious consequence of Fed actions, and this reveals in the commodity markets. Fossil fuels are marking time before a further downturn, rising interest rates and modest global growth are similarly weighing on precious and industrial metals, while many ags and softs are rallying off low levels that will likely be retested. So too will the October lows in equities once FOMO-fixated investors digest the Fed’s recent pronouncement and accept the unedifying economic reality unfolding around the world.
My current positions include 3M (MMM), Pfizer (PFE), and a large position in SPXU, which nets out to an extremely short position in equities.