While much of the media focus in the last trading week of the quarter has been on the seasonal selloff across world stock markets, this trading action comes as part of a wider shift in capital flows and investment thinking.
Between last week’s Fed statement, member projections and subsequent comments from Fed officials, particularly Chair Powell, plus the two hawkish dissenters at last week’s Bank of England meeting, talk about more central banks tapering back emergency stimulus continues to grow louder. In particular, for the US, a start to tapering before the end of 2021, an end of asset purchases by the middle of 2022 and interest rate increases in the US and Canada by the end of 2022 is starting to look increasingly likely, particularly if inflation pressures persist.
Meanwhile, investors and companies have started to look ahead to earnings season. While recent results have remained positive, guidance and pre-announcements have started to soften, and a number of companies have identified supply chain struggles and disruptions. With year over year hurdles starting to toughen going forward, investors also appear to be revisiting their expectations and valuations. In particular, the previously high-flying technology sector has come under increased scrutiny and has started into a correction.
Continuing political uncertainty in the US related to infrastructure, spending, the debt ceiling, and a potential government shutdown isn’t helping sentiment either. The economic calendar for the coming week is pretty light, which may keep more of the spotlight on political events and market action. Employment reports for the US and Canada are not out until Friday the 8th, so the coming week is dominated by Manufacturing PMI reports Friday, Service PMI reports Tuesday and US ADP payrolls next Wednesday.
In this issue of Equity Leaders Weekly, we look at crude oil approaching a key technical turning point and at the implications of rising US traded interest rates.
In addition to recent comments and projections from the Fed, an upturn in US traded interest rates has also been ringing the last call bell for the easy money party. In the last few days, the CBOE 10-year US treasury bond yield (TNX.I) has climbed back up above 1.50% while the 30-year yield (TYX.I) has regained 2.00%. The combination of these breakouts appears to have rattled investors and sparked a significant repositioning. Generally speaking, increasing US traded interest rates have tended to be bearish for bonds, bullish for the US Dollar and bearish for US Dollar denominated assets including gold, commodities and stocks. In the case of stocks, the short-term implications of reduced liquidity and more expensive borrowing can be seen as bearish but because rising interest rates usually coincide with a strong economy and business environment, the longer-term implications may be bullish unless we get stagflation. Initially, the equity market reaction to this move in interest rates has been to rein in positions at the margins, particularly in volatile and richly valued areas of the market like technology, communications and health care. A pullback in TNX.I bottomed out in August near 1.15% and since then, the rate has been bouncing back, establishing a range between 1.15% and the April peak near 1.75%. A move above 1.75% would complete a bullish Double Top pattern, signal the start of a new upleg that could potentially challenge 2.00% and potentially trigger another round of capital flows across asset classes and between sectors.
While a rising US Dollar has put some commodities, particularly metals, under pressure, Crude Oil and Natural Gas have soared in the last week. Years of underinvestment appear to be catching up to the industry as demand continues to bounce back. While OPEC+ and others have succeeded in keeping supply in check to support the price over the last year through COVID related demand disruptions, the issue of supply disruptions has become more prevalent recently. In the US, it has taken longer to bounce back from the impact of Hurricanes Ida and Nicholas on Gulf of Mexico production, in Africa, some OPEC+ members have been unable to take full advantage of supply quota increases, and in the UK there have been concerns about gasoline shortages from distribution problems. These issues have sparked a rally in crude oil (CL.F) this month, driving the price back up to a retest of $77.40 resistance, a level last seen in July and then back in 2018. Three years ago, a price rally was capped by President Trump increasing supply from the US Strategic Petroleum Reserve. It remains to be seen what President Biden would do. Notwithstanding any political intervention, which is hard to predict, a breakout over $77.50 would carry oil back up to its highest level since 2014 and complete a bullish Spread Double Top breakout. This could open the path toward a retest of the $100.00/bbl round number. Initial support in a pullback could appear near $65.90 based on a 3-box reversal.
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