Wheat Continuous Contract (W.F) & Sector Scopes Monthly Update March 2022

In the absence of other notable business news, the ongoing war in Ukraine has continued to create turmoil in world markets over the last week, sparking significant capital flows across and within asset classes. For most of the last week, sentiment has been “risk-off” with capital fleeing equities for commodities (crude oil soared above $125/bbl to its highest levels since 2008) and defensive havens (sending gold back up above $2,000/oz). Yesterday, however, this reversed a bit with stock markets, particularly in Europe rebounding, while gold and oil dropped back. It remains to be seen if this was a dead cat bounce or the start of a larger reversal of fortune.

Starting today, however, some of the focus may shift toward how central banks are going to respond to high inflation in a time of high political tensions. The European Central Bank meets today, followed by the Fed next Wednesday and the Bank of England plus the Bank of Japan later next week. With inflation running far above most central banks’ long-term goal of 2.0%, and energy plus grain prices continuing to climb, central bankers appear to have fallen far behind the curve and are under pressure to start tightening even in the face of political uncertainty. In recent weeks, the Bank of Canada and the Reserve Bank of New Zealand raised interest rates, and there is a growing question of whether any delay to tightening now would just force central bankers to have to tighten more to catch up later.

In addition to its monetary policy decision, the Fed on Wednesday will also be releasing its quarterly forecasts for GDP, inflation, unemployment and fed funds. Back in December, the fed was looking at a Core PCE inflation rate of 2.6%, in January it was running at 6.1%. Fed members were also forecasting 1-4 interest rate increases this year with the largest group anticipating 3 hikes in 2022. The Fed has 7 meetings remaining this year and there have been hints that every remaining meeting this year could potentially be live for a possible rate hike, but the dot plot could give a better idea on this.

Earnings season is done with only a few scattered reports due next week. There are a number of economic reports on the way starting with Canadian employment tomorrow and continuing with retail sales reports from the US, UK, Canada and China over the course of next week.

In this issue of Equity Leaders Weekly, we take our monthly look at sector scopes and at inflation in grain prices.

Most of the public conversation of late related to inflation has been around soaring oil and record prices at the pumps. Perhaps just as important, is that food prices are soaring as well. In addition to being a pipeline transit country, Ukraine is one of the world’s largest producers of grains, and the start of war just ahead of planting season has sent grain prices skyrocketing to their highest levels in over a decade.

This long-term chart shows that the price of wheat (W.F) bottomed out in 2018 and had started to climb in 2021. What had been a steady, orderly uptrend has accelerated dramatically this month, sending wheat spiking up toward a retest of its 2008 peak near $1,390 per hundred bushels.

On a breakout, next potential resistance appears near the $1,500 round number, then $1,910 based on a horizontal count from the late 2020 bullish Spread Quintuple Top breakout that kicked off the current uptrend. Initial support appears near $1,100 based on a 3-box reversal and a round number.

The Sector Scopes feature in SIA Charts, found in the Markets – BPI section, provides investors with a snapshot of the bullish percent (percentage of stocks in a group on a bullish charting signal) for 31 industry groups. This provides us not only with a indication of market sentiment at a point in time, but also a visual way to evaluate changes in attitudes and capital flows between groups over time.Over the last month, we have seen a decisive shift in the sectors from well spread out and slightly bearish to a high concentration in the leftmost columns. This can be seen as a sign of bearish sentiment and a falling market. A growing number of sectors in the leftmost column also suggests that the market may be starting to get oversold, which may partly explain yesterday’s morning market rebound.

Action in selected sectors highlights the varying impact of the war on different groups. One of the biggest collapses in bullish percent possible from the far right to the far left occurred in Banks, and Financial Services did poorly as well, which could be a reflection of new sanctions on banking activity and funds transfers. Energy and Metals remained on the right hand side. Two other sectors which held up relatively well were Utilities, perhaps on increased recognition of the importance of a stable power supply, and Aerospace & Defense, perhaps on speculation that several countries may need to step up their military spending.